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ELEMENTARY ECONOMICS 



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THE MACMILLAN COMPANY 

NEW YORK • BOSTON • CHICAGO • DALLAS 
ATLANTA • SAN FRANCISCO 

MACMILLAN & CO., Limited 

LONDON • BOMBAY • CALCUTTA 
MELBOURNE 

THE MACMILLAN CO. OF CANADA, Ltd. 

TORONTO 



ELEMENTARY ECONOMICS 



AN INTRODUCTION TO THE STUDY OF 
ECONOMICS AND SOCIOLOGY 



BY 

FRANK TRACY CARLTON, Ph.D. 

PROFESSOR OF ECONOMICS IN DE PAUW UNIVERSITY 

FORMERLY PROFESSOR OF ECONOMICS AND 

SOCIOLOGY IN ALBION COLLEGE 



THE MACMILLAN COMPANY 



1920 

All rights reserved 



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Copyright, 1920, 
By the MACMILLAN COMPANY. 



Set up and electrotyped. Published January, 1920. 



WN 2? 1920 



WnrinooU Press 

J. S. Gushing Co. — Berwick & Smith Co. 

Norwood, Mass., U.S.A. 



.A559470 



CONTENTS 

PAGE 

Introduction 1 

The changing world in which we Hve — Business activity — 
What is economics ? — Topics for discussion. 

PART I 
OUTLINE OF INDUSTRIAL AND SOCIAL EVOLUTION 

CHAPTEK 

1. Getting a Living under Various Conditions . . 1 

Industrial stages — The hunting and fishing stage — The 
pastoral stage — The agricultural stage — The small tool age 
— The factory era — Topics for discussion. 

2. Industrial Progress in the United States ... 16 

Colonial and pioneer America — The nineteenth century — 
Growth of the business unit — The evolution of the shoemak- 
ing industry in the United States — The twentieth century — 
The complexity of modern life — Topics for discussion. 

PART II 
FUNDAMENTAL ECONOMIC CONCEPTS 

3. The Production of Commodities 27 

Why business is carried on — Exchange — Classification of 
industries — Essentials of big business — Topics for discus- 
sion. 

4. Wants and Value 35 

Why do people want commodities ? — Utility — Why are 
land and capital desired ? — Value — Price — Topics for dis- 
cussion. 

V 



Vi CONTENTS 

CHAPTER PAGE 

5. Direction of the World's Workers .... 43 

The national income equals the production of the nation — 
The consumer and business enterprise — Savings — Luxury 
and waste — The rights and duties of the consumer — Topics 
for discussion. 

6. Shares in the National Income .... 53 

Wages — Individual bargaining — Collective bargaining — 
Arbitration — Minimum wage — Interest — Rent — Dimin- 
ishing returns — Rent and land value — Profits — Sugges- 
tions and topics for discussion. 

7. Wealth and Income .69 

Distribution of wealth in the United States — Income — 
Family budgets — Topics for discussion. 

8. Growth and Distribution of Population ... 74 

The increase in population — Growth of cities — Popula- 
tion and resources — The immigrant in the United States — 
The Negro problem — Topics for discussion. 

9. Competition and Monopoly 81 

Regulated competition — Classification of monopolies — 
Examples of natural monopolies — Topics for discussion. 

PART III 
ECONOMIC PROBLEMS 

10. Money and Banking 91 

Money is a measure of purchasing power — Metallic 
money — Coinage — Paper money — Credit — Banks — The 
clearing house — Banks in the United States — Paper money 
issued by banks — Suggestions to teachers. 

11. Forms of Business Organization 101 

The nature of business — The single enterpriser — The 
partnership — The corporation — Bonds — The trust — Co- 
operation — Governmental enterprise. 



CONTENTS vii 

CHAPTER PAGE 

12. Railway Transportation 109 

The importance of the railway — Growth of the American 
railway — The railway is a monopolistic business — Regula- 
tion or public ownership. 

13. Municipal Monopolies 119 

General principles — Water — Gas, electricity and trans- 
portation — Other municipal industries — Topics for dis- 
cussion. 

14. The Labor Force 126 

Labor in modern industry — Immigration — Restriction of 
immigration — Routine work — The migratory worker. 

15. Labor Organizations 133 

Why is labor organized ? — Relation of employer to em- 
ployee — Knights of Labor — The American Federation of 
Labor — The structure of a labor organization — The In- 
dustrial Workers of the World — Employers' associations — 
Topics for discussion. 

16. Labor Legislation 142 

The labor contract — Attitude of the courts — The ad- 
vantage of a short working day — Legislation in regard to 
child and woman labor — Topics for discussion. 

17. Methods of Paying for Labor . . . . . 150 

Time wage — Piece wage — Premium plans and scientific 
management — Profit sharing — Cooperation — Topics for 
discussion. 

18. Agricultural Economics . . . . . . . 158 

Farming as a business — Peculiarities of the business of 
farming — Agricultural statistics — Farm tenancy — Farm 
labor — Riu'al social problems. 

19. Insurance 165 

What is insurance ? — Social insurance — Workingmen's 
compensation — Health insurance — Unemployment insur- 
ance — Provisions for enlisted men and their families — 
Topics for discussion. 



viii CONTENTS 

CHAPTER PAGE 

20. Marketing 174 

Inefficient methods — Proposals for betterment — Adver- 
tising — Topics for discussion. 

21. Public Expenditures and Public Debts . . . 180 

The functions of government — Expenditures of different 
governmental units — Analysis of expenditiu-es — Public 
debts — Topics for discussion. 

22. Taxation . . .187 

Governmental income — The budget system — Definition 

— Tariffs — Internal revenue — The federal income tax — 
State and local taxation — The corporation and license taxes 

— The general property tax and special assessments — Jus- 
tice in taxation — Topics for discussion. 

23. Industrial Unrest .196 

Causes of industrial unrest — Distribution of wealth — 
Unemployment — The denial of justice — Denial of the 
right to join labor organ^izations. 

24. Social and Industrial Betterment 202 

Plans for betterment — The single tax — Socialism — 
National guilds — Anarchism and syndicalism — The pro- 
gram of the sociologists. 



ELEMENTARY ECONOMICS 



ELEMENTARY ECONOMICS 



INTRODUCTION 

The Changing World in Which We Live. The world in 
which we live is an ever changing, restless world ; it is not 
static or at a standstill. Institutions, laws and ways of 
getting a living are different to-day from those prevailing 
when George Washington was President; and before the 
year 2000 is ushered in many further changes will occur. 
There is progress, or at least change, as the years go by in 
government, in moral ideals and in methods employed in 
industry. " Constant change is the law of life, in institu- 
tions as well as in animals." 

It is very difficult for us who live in the present age of 
variety, of luxury and of power over nature, to picture the 
long, hard journey through which mankind has passed in 
order to reach the present stage of civilization. The primi- 
tive man was but little above the animal ; he lived in caves 
and hunted and fought as an animal. In the early ages 
of semi-civilization, men cooked with hot stones placed in 
wooden vessels. These vessels were coated with clay to 
prevent burning. Finally, clay vessels were used, and pot- 
tery came into being. Sugar was unknown to the Romans, 
and Washington's residence was without stoves. " The 
people in the main part of the world never had any potatoes, 
corn, tomatoes, peanuts, nor turkeys until after America 
was discovered." The writer's father never saw or heard 

B 1 



2 ELEMENTARY ECONOMICS 

of many things with which we, only a Httle more than a 
generation later, are familiar, — the automobile, wireless 
telegraphy, the submarine, the fireless cooker, or a building 
made of concrete. We of to-day live in a new, wonderful, 
and constantly shifting world, — a superb moving picture. 

A half century has greatly modified the food supply of 
the people. The monotonous, badly cooked diet of a few 
decades ago has been replaced in many homes by a well- 
balanced variety. " Cheap transportation has brought 
the products of the tropics to our doors, and refrigeration 
and canning have annihilated time as far as the food supply 
is now concerned." The importance of this change in con- 
serving the health of the indoor worker can scarcely be 
overemphasized. The lighting, heating, and sanitation of 
dwelling places and workshops have been revolutionized 
since the day Fort Sumter was fired upon. 

Business Activity. Human beings are creatures of wants 
or desires; and the wants of the modern man and woman 
are a multitude compared with those of the primitive man 
or even of the pioneer. These varied wants or desires of 
the men and women of to-day are satisfied through all sorts 
of activity, but chiefly as the result of the activity called 
work or business. In order to satisfy wants and to obtain 
desired articles and services, men combine and cooperate 
and struggle and compete with one another in the business 
and the social world Likewise, groups of individuals and 
nations do the same thing. 

Robinson Crusoe did not have a complicated method of 
satisfying his wants; and the pioneer of America also sup- 
plied his wants in a very simple fashion. But to-day in 
modern complex society, the wants and desires of the average 
person are many, and the satisfaction of those wants involves 



INTRODUCTION 3 

many intricate problems. Many cooperating individuals, 
not one or a small group, are concerned. Economics is, 
therefore, a social science. In the social sciences — eco- 
nomics, sociology and political science — the changes in 
institutions, laws, and ways of getting a living, and their 
effects upon men in their relations to other men, are studied. 
In economics, the wants and the satisfaction of the wants of 
men and women are investigated. Two of the fundamental 
questions in economics are : why are certain commodities 
or services wanted ? and how are these wants satisfied ? 

It is the intricate mechanism used to supply the wants 
of men and women, you and me and all of us, the complex 
mechanism of business, that we are to study. How did the 
machinery of the business world come into being? Why is 
it utilized? What keeps it going? These are some of the 
underlying problems in economics. Wherever an oppor- 
tunity presents itself to provide an income by supplying 
the wants of people, sl worker, — a business man — appears 
to do the necessary service — for compensation, of course, 
which in turn enables him to buy the products of others. 
We are also able to enjoy many things in common. Nearly 
everybody uses the railway. The city waterworks and 
electric lighting plants are for collective use. Playgrounds, 
schools, and streets are utilized by many individuals, and 
as a rule are owned by the community. 

What Is Economics? In economics are studied the 
methods by means of which men get a living or obtain the 
necessities, comforts and luxuries of life. Economics is a 
study of the interrelationship of men and women in the 
business world or in the process of earning a living or of 
satisfying their wants and desires. Economics is not a 
science in which the problems discussed can be proved mathe- 



4 ELEMENTARY ECONOMICS 

matically; and it fairly bristles with controverted points. 
In the study of the social sciences, the student must always 
try to look on both sides of a question. He should endeavor 
to draw his conclusions independently instead of accepting 
blindly and without question the statements of the textbook 
or of the teacher. Mere memorizing is of little importance. 
In many other subjects — language, ancient history, 
chemistry, mathematics — the student begins the study of 
the subject with few or no preconceived notions. All is 
new, and the material does not touch everyday affairs. In 
economics, the familiar matters of industrial and social life 
are considered. We all have our preconceptions and our 
class or interest bias. Although a person without training 
in engineering would hesitate to offer solutions for difficult 
engineering problems, and persons without legal training 
rarely attempt to solve legal difficulties, nearly everybody 
feels competent to discuss economic problems and to offer 
definite solutions. The student in economics ought to be 
cautioned against prejudice and against conclusions based 
upon inadequate analysis. Economics is an interesting and 
practical subject, and it is concerned with matters which 
touch everyday life, — questions of prices and markets, 
taxation, banking, tariff, wages, rent, transportation, and 
ownership of property. 

TOPICS FOR DISCUSSION 

1. Contrast the life of the primitive man with that of your 
neighbor. 

2. Name six recent important inventions. 

3. Do you know of any recent changes in the diet of the American 
people ? 

4. What different kinds of business are followed by the men and 
women of your town or city? 

5. Why is economics a social science ? 



PART I 

OUTLINE OF INDUSTRIAL AND SOCIAL 
EVOLUTION 



CHAPTER I 
GETTING A LIVING UNDER VARIOUS CONDITIONS 

Industrial Stages. The characteristics of individuals and 
of groups of persons are in no small measure the resultant of 
the occupation they follow, of the manner in which they get 
a living. The roving, hunting, and fighting tribesman of 
the primitive world is very different from the land-owning, 
land-cultivating, stay-at-home farmer of to-day. The hardy 
and resourceful pioneer who pushed into the American wilder- 
ness a few decades ago possessed traits of character which 
are not fostered through contact with the routine of a big 
manufacturing plant. Each one of us is in no small measure 
the product of the training he has received and the environ- 
ment in which he has lived. The occupation of the adult 
has stamped him with certain traits and peculiarities which 
are not easily erased or canceled. The different eras or 
stages in industrial life, or in the predominant methods of 
getting a living for the members of the human race, may be 
classified in five broad divisions : hunting and fishing, 
pastoral activities, agriculture, small-tool work, and ma- 
chine or factory employment. The fundamental basis for 
this arrangement of stages in industrial life is the growing 
power of men over natural forces and resources. These 
stages also mark differences in the characteristics, habits, 
and ideals of men and women; the methods by means 
of which people associate with one another are also very 
different in the various stages. 

7 



8 ELEMENTARY ECONOMICS 

The Hunting and Fishing Stage. The most crude and 
primitive form of getting a living was through the gathering 
of berries and nuts, and by hunting and fishing. The primi- 
tive hunting and fishing tribes made no effort to keep up the 
supply of nuts, berries, game, or fish. The savage took what 
the field, forest, and stream offered. In times of plenty 
he gorged himself; in times of scarcity he starved. Agri- 
culture, mining, and manufacture — business — were things 
of the future. The density of population was very low, and 
large areas were necessary to support the hunter and the 
nut gatherer. The man of the hunting and fishing stage 
was a rover because it was necessary to find a food supply. 
The primitive man could not make the food supply come 
to him. Consequently, the savage had no fixed habita- 
tion ; he was constantly searching for a food supply. 

Any encroachment upon the hunting grounds by another 
tribe meant reduction of food supply. It signified more 
mouths to feed from the same source of supply; it spelled 
scarcity. Since the savage could not increase the food 
supply, the only hope of avoiding starvation lay in driving 
out or exterminating the intruder, or in finding new hunting 
grounds. The latter alternative would probably lead to 
struggle with still another tribe. The savage hunter be- 
came of necessity a ruthless enemy of all intruders. All 
strangers were enemies; they were a menace to the food 
supply and, hence, to the welfare and even to the life of all 
members of his tribe. Food — the basic necessity of man- 
kind — was scarce. Other tribes, other hunters and fishers, 
coming into touch with a primitive tribe or group, meant 
scarcity and privation. The struggle for existence was 
bitter, constant, never-ending. To the strong and the 
crafty, to the tribe which stood together as a unit, went the 



GETTING A LIVING 9 

victory. The meek, the sympathetic, and the weak were 
pushed to the wall in the strenuous primitive world of 
our ages-distant ancestors. 

Sympathy and charity for members of other tribes were 
inimical to the welfare of fellow tribesmen. Cruelty and 
ruthlessness were necessary to tribal survival and success. 
Yet, within the tribe teamwork was essential. The members 
of a tribe hunting large and dangerous game or fighting 
other savages must band together and hunt and fight to- 
gether, or suffer destruction. Even in the hunting stage 
primitive man began to learn that he must unite with others 
in order to supply his wants and keep out of danger. The 
savage as well as the civilized man cooperated and combined 
with others ; but the primitive cooperating group was small 
and unstable. War in the hunting stage of human existence 
was a struggle for hunting grounds The strong tribes, 
the tribes that were strongly knit together, obtained the 
good food supply, and waxed stronger. 

Slavery was not found in the hunting and fishing stage, 
except possibly within the family. Defeated enemies were 
slain ; captives were not taken. A slave would have meant 
one additional person to feed ; to force the slave to hunt for 
the benefit of his captors was dangerous because weapons 
must be given him. With weapons in his hand, the slave 
might turn upon his master; or, while hunting, the former 
might easily escape. The captives of a hunting tribe were 
therefore killed ; and sometimes they were eaten, thus add- 
ing to the food supply. 

Because of the scarcity of food and the severity of the 
struggle for existence, the population of a given land area, 
in the hunting stage, was very small. The hunting tribe 
was composed of a small number of persons; the govern- 



10 ELEMENTARY ECONOMICS 

merit of the group was weak and not well organized. The 
physically strong men and the old men who were shrewd 
and wise in council dominated. The primitive man faced 
a multitude of dangers, seen and unseen; fear of impend- 
ing danger was ever present. He who was supposed to 
possess the power to propitiate the unseen forces was looked 
up to. Beligious and other ceremonial forms were empha- 
sized by most primitive peoples. The uncertainty of life and 
of the fortunes of the chase or the battle are responsible for 
the firm belief of the savage in luck and magic, a traditional 
concept which modern people have not entirely outgrown. 

The Pastoral Stage. The domestication of animals 
enabled the primitive man to obtain a food supply in a 
better and somewhat more certain fashion than that em- 
ployed by the nut gatherer, the hunter, or the fisherman. 
The pastoral or shepherd people were able to increase the 
supply of the means of subsistence. Flocks and herds of 
domesticated animals or of semi-domesticated animals 
afforded a fairly stable supply of milk and of meat. Like 
the hunter, the pastoral people were rovers. They moved 
as their flocks required new pasturage. The steppe country 
of Asia is probably the original home of the pastoral people. 
Private property in flocks and herds began to develop, but 
not private ownership of land. Little personal property 
was obtained because little could be carried on the constant 
journeys from place to place. In this stage of human 
development are found the beginnings of a contrast between 
rich and poor. The Jews of the time portrayed in the Book 
of Genesis were in the pastoral stage, as were also the Britons 
at the time of Caesar's invasion. 

The Agricultural Stage. The crude beginning of the 
cultivation of the soil marks a revolutionary change in the 



GETTING A LIVING 11 

mode of living and of associating. The first signs that 
foretell the rise of modern civilization are found in the dis- 
covery of the use of fire and of agricultural implements. 
As increased density of population was now possible, the 
soil could be made to provide a greatly increased food 
supply. Perhaps a thousand times as many people could 
be supported on a given area under primitive hoe culture 
as could find subsistence by hunting; and many more can 
be sustained on an acre under better and more modern 
agricultural methods. 

Slavery now replaced the killing of captives and cannibal- 
ism. Instead of killing and eating their enemies, the con- 
querors put the captives to work. Slavery also gave man- 
kind a much-needed drill and discipline in hard routine 
labor. The transformation of the primitive, restless hunter, 
without an inkling of the meaning of regularity and per- 
sistency, into the modern business man and routine wage 
worker has indeed been a long and difficult process. 

With the development of primitive agriculture came 
fixed habitations. The roving tribe was gradually changed 
into a group which recognized one spot as home to which 
the men returned from time to time. The men of the 
tribe continued to be hunters and warriors ; but the women 
and the slaves became agricultural workers. The idea of 
private property in land began to appear. Each family 
wished to reap the fruits of its toil; and this meant more 
or less exclusive control of certain plots of cultivated or 
cultivatable land. Since the members of the tribe were 
more permanently located, better living quarters were 
presently demanded. The rude hut or house was soon 
built. Tilling the soil, planting the seed, waiting for the 
harvest, and saving the necessary seed, all required a gradual 



12 ELEMENTARY ECONOMICS 

growth of foresight unknown to the shortsighted and shift- 
less hunter. The foundation stones of modern civihzation 
were laid in the early agricultural stage. 

The Small-tool Age. The next step in the evolution of 
human society is the small-tool or handicraft stage. Towns 
and town life are found in this era. America was discovered 
in this period in the history of western Europe. The Ameri- 
can pioneer and frontiersman was a handicraftsman using 
small tools. Manufacturing was always carried on in 
pioneer days on a small scale, and often in connection with 
farming. Craftsmen as a rule worked for themselves and 
used their own tools. They owned the raw material which 
they used, and sold the finished product. Some countries, 
for example, China and India, have not as yet reached the 
factory stage and are still in the small-tool era. Certain 
industries are also in that stage, for example, the arts and 
crafts industry, cooking in private homes, and peasant farm- 
ing. 

The Factory Era. The use of steam power and of ma- 
chinery made possible the factory. The opening of the 
factory era marked a revolutionary change in living and 
working conditions. It is often called the industrial revo- 
lution. England was the first nation to pass into the 
factory era. In the United States, it began about a century 
ago ; in England, nearly a century and a half ago. With 
the factory, machinery, and the use of steam power, came 
the rapid growth of cities. The workingmen were forced 
to live near the factories. In the factory, the raw material, 
the machines and tools, and the finished product belonged 
to the employer or capitalist. The workers received com- 
pensation in the form of wages. Many kinds of work that 
had hitherto been performed in the homes were now done 



GETTING A LIVING 13 

in factories. Both the working and the home environment 
change greatly as a country passes into the factory era. 
Both the business unit and the governmental unit grow 
as better facilities for transportation enlarge the market 
area. 

The agricultural stage represents the high-water mark of 
slavery. As towns developed and trade grew, slavery was 
softened into serfdom and indentured service, and finally 
into the wage system with which we are now familiar. The 
slave system has never been able to obtain a firm foothold 
where either the small-tool system or the factory has held 
sway. Neither did slavery prove eflftcient on the small farm 
which produced a variety of crops, such as has been char- 
acteristic for years of the northern portion of the United 
States. 

Nearly all the important political, social, and economic 
problems of to-day grow out of the development of factories 
and great cities. Economics and sociology are fruits of 
the complex machine period. The nineteenth century 
made the world a great neighborhood. We of to-day are 
living in an era of interdependence; all preceding eras or 
stages in human evolution have been predominantly char- 
acterized by self-sufficiency. This fact may be brought out 
clearly and concretely by considering briefly the industrial 
evolution which has been going on in our own country. 
Within a comparatively brief period of time the territory 
now known as the United States has passed from the hunt- 
ing and fishing stage to the factory era. Indeed, until the 
western frontier line faded and frontier life ended a short 
time ago, within the boundaries of the United States could 
be found all the different stages of industrial development. 
Within a generation, the United States has passed from 



14 ELEMENTARY ECONOMICS 

a position of international isolation to one of world 
leadership. 

These five stages present with considerable historical 
accuracy the course of events in the evolution of human 
industry; but such a consideration alone omits reference 
to the very significant changes in the attitude of workers 
seeking a living towards the methods of prosecuting such 
endeavor. The primitive man, like the animals, was guided 
chiefly by instinct, by guesswork, by luck, by a belief in 
the operation of magic, and by a reliance upon sacrificial 
ceremonies. Only in recent years, after the factory age 
has been reached, do reasoning and scientific planning in 
industry displace instinct, luck, guesswork, and reliance 
upon magic. Business, the use of markets, and division 
of labor reach back into the small-tool and even into the 
agricultural stage ; but business does not attain a high state 
of development until the factory period is entered. Even 
war, which is a survival coming down from the hunting and 
fishing stage, is now to a large degree a matter of technology. 
Factories are as essential as fortifications and firing lines. 

The primitive man would not hunt or go to war unless 
the signs and omens were auspicious, or until he had sacrificed 
to the gods. The early agriculturist would only plant at 
certain times and according to certain definite ceremonial 
forms. There are to-day American farmers who insist that 
certain crops should be planted '' at the right time of the 
moon." The great majority of the men and women of 
to-day are influenced by certain hard and unyielding preju- 
dices and inherited concepts coming down from the early 
ages of human existence. Reason and science continually 
meet as obstacles prejudice and superstition ; but gradually 
the former are gaining upon the latter. 



GETTING A LIVING 15 

TOPICS FOR DISCUSSION 

1. Why did the members of hunting tribes often " go hungry" ? 

2. Why was it necessary for primitive men to band together 
into groups and tribes ? 

3. Why did the beginnings of agriculture cause important social 
changes ? 

4. Do you know of any industries now in the small- tool stage ? 

5. Are you acquainted with any person who believes in " signs " ? 



CHAPTER II 
INDUSTRIAL PROGRESS IN THE UNITED STATES 

Colonial and Pioneer America. During the colonial and 
revolutionary periods in American history and for some 
years after, industry in this country was in the small-tool 
stage. Manufacturing was carried on in the home and in 
the small shop. The typical American of a century ago, as 
in the earlier periods of our history, was the hardy, self- 
reliant pioneer farmer who lived his life in isolation from his 
fellow men. Each family produced for itself nearly all that 
it consumed. Exchange of products with others was in- 
considerable. Meat, butter, grain, and horses were often 
exchanged for sugar, salt, spices, and certain manufactured 
products, such as farming implements and tools. The 
farmer was a jack-of-all-trades. He was not only a farmer 
but also a blacksmith, carpenter, butcher, carrier of products, 
hunter, and primitive policeman. The pioneer performed 
numerous tasks each and every day; and the particular 
kind of tasks to be performed varied with the weather and 
the season and the year. The hours of daily toil were long, 
usually from sunrise to sunset; and the chief sources of 
power were three : men^ horses, and oxen. The farmers 
and other workers of a century or more ago knew little or 
nothing of the minute division of labor and the routine 
work with which we of to-day are so familiar. The typical 
American of early times was in a large degree independent 
of the outside world. He knew very little about the people 
and the living conditions beyond the boundaries of the 

16 



INDUSTRIAL PROGRESS IN THE UNITED STATES 17 

township or the county or possibly the state in which he 
Hved. When men did associate or work together, it was of 
necessity only in small groups. There were no large cities 
and no huge smoking factories; and the means of trans- 
portation and of communication were still very primitive 
and extremely slow and uncertain. Before the Revolu- 
tionary War, it took a week to go from Boston to New York 
City — a distance of 230 miles by stagecoach. In the first 
years of the nineteenth century, five and one-half days were 
required to journey from Philadelphia to Pittsburgh, — a 
distance of 310 miles. The work of the average American of 
a century ago tended to bring him into contact with many 
kinds of simple productive activity, but his isolation from 
the outside world tended to give him a narrow and pro- 
vincial view of life. However, the railway and the steamboat 
and the telegraph were soon to cause revolutionary changes. 
The Nineteenth Century. The nineteenth century was 
an epoch of extraordinary industrial and business progress 
and of revolutionary changes in social and political con- 
ditions. The economic problems to be studied in Part III are 
practically all products of the nineteenth century. England 
led the way in the use of machinery and of steam power. 
The first factories were for the manufacture of cloth. By 
1820, in the rapidly growing towns and cities of America, a 
great variety of craftsmen were working at their trades, 
and textile factories were becoming numerous. The old 
and simple industrial era was changing rapidly in the north- 
eastern portion of the United States. At the end of the 
century there were more than a half million manufacturing 
plants in this country, employing over five million wage 
earners, and annually producing products valued at over 
thirteen thousand millions of dollars. The number of 



18 ELEMENTARY ECONOMICS 

workers employed in manufacturing alone in 1900 was nearly 
as great as the entire population of the nation in 1800. 

The completion of the first great American canal, the 
Erie Canal, in 1825, which joined the Hudson River with 
the Great Lakes, reduced greatly the obstacles to trade and 
communication between the Atlantic seaboard and the 
great central portion of the nation. The pioneer American 
railway was the Baltimore and Ohio. Construction began 
in 1828 ; in 1830, thirteen miles of line were placed in opera- 
tion. The first transcontinental railway route linking the 
Pacific coast to the Mississippi valley and the Atlantic 
states was opened in 1869. The railway network grew 
rapidly. In 1850, the railway mileage was 9000; in 1860, 
30,600; in 1880, 93,000; in 1910, 240,000. Along with 
the evolution of the railway has come progress in manu- 
facturing, mining, and merchandising.^ A brief discussion 
of the growth of the business unit and of one particular 
industry will serve to illustrate the connection between 
transportation and other forms of industry, as well as to 
picture the course of events during the nineteenth century. 

Growth of the Business Unit. The pioneer farmer of 
the Middle West, the New England manufacturer or the 
city storekeeper of the Revolutionary period, was not en- 
gaged in a large business. Only a few articles were pro- 
duced for the market, and those articles were not carried 
far. Transportation facilities were poor, and the markets 
were small and local. Specialized workers and special 
machines were not employed, because it was not profitable ; 
these could only be utilized for a short time each year. A 
machine to turn out spokes for wagon wheels could have 

1 For further statistics in regard to the industrial progress of the country, 
see any industrial history of the United States. 



INDUSTRIAL PROGRESS IN THE UNITED STATES 19 

been used only for a few hours each year by the country 
blacksmith and wagon maker; he marketed only a few 
wagons each year. But the big factory of to-day uses a 
machine to turn spokes for wagon wheels ; so many wagons 
are produced each year that this special machine is kept 
busy all the time. A big business must have extensive 
markets ; it must be able to sell many of each variety of 
articles it manufactures. Specialized workers and special 
machines — subdivision of labor — can profitably be used 
only in large factories selling to extensive markets. 

The Evolution of the Shoemaking Industry in the United 
States. The business of making shoes has passed through 
changes which are typical of other old and important in- 
dustries. The first American shoemaker was an itinerant; 
he went from home to home carrying his tools with him. 
The customer for whom he worked furnished the leather 
and owned the boots or shoes produced. The shoemaker 
was paid for the work done in the home of his customer. 
No problems concerning the price of shoes arose under this 
crude and small-scale method of making shoes; there was 
as yet no merchant-function in the shoe business. 

Gradually the itinerant shoemaker was replaced by the 
" settled shoemaker " who owned his little shop. He no 
longer went to his customers ; they came to his shop. The 
shoemaker bought his raw material and worked it into boots 
and shoes made to the order of his customer. The shoe- 
maker became a merchant as well as a shoemaker ; he per- 
formed a double function. Price problems now appeared. 
Presently another step was taken. Whenever the shoemaker 
had spare time, he commenced to make shoes, without 
waiting for a specific order from a customer. Out of this 
habit the shoemaker developed the function of a retail shoe 



20 ELEMENTARY ECONOMICS 

merchant. The front of his shop was partitioned off for a 
shoe store, and the rear of the building continued to be the 
shop proper where the shoes were made. But the market 
was as yet only local and not extensive. The shoemaker, 
as his business grew, hired other workers and devoted much 
of his time to selling shoes. 

The next stage in the evolution of the business began 
when the merchant-shoemaker decided to seek a wider 
market for his shoes. Samples were carried by traveling 
salesmen to more distant customers or to merchants in other, 
but near-by, towns. The business becomes in part whole- 
sale; and the work of actually making the shoes passes 
almost entirely into the hands of journeyman shoemakers 
hired by the merchant. The shoemaker is now a wage- 
worker in the employ of the shoe merchant. The goods are 
transported over the highway or by water. With the 
development of the railway, the market area grows larger, 
and the distinction between the wholesale-employer and 
the retail shoe merchant grows more and more sharp. Shoes 
are still made by hand with the use of the old hand tools, 
but the merchant is no longer a journeyman shoemaker. 

Finally, machinery is invented in the shoe industry, and 
the old shoemaker sitting at his bench is displaced by factory 
hands. Subdivision of labor becomes the order of the day. 
One worker no longer makes a whole shoe; each factory 
worker performs one small portion of the entire work of 
making a shoe. The trade of the journeyman shoemaker 
has been destroyed by the invention and use of shoe ma- 
chinery. The manufacturer-employer now directs the busi- 
ness ; he owns the factory, the raw material and the finished 
product, and he also hires the factory wageworker. The 
manufacturer sells the machine-made products to the whole- 



INDUSTRIAL PROGRESS IN THE UNITED STATES 21 

sale merchant, and the latter in turn furnishes shoes to the 
retail shoe merchant. In recent years, some shoe manu- 
facturers have been selling directly to the retail store, thus 
eliminating the wholesaler or jobber. The great shoe 
factory only became a practicable business proposition, 
however, after transportation and credit facilities were well 
developed. The factory signifies a national or a world 
market. 

The Twentieth Century. In the opening years of the 
twentieth century, the scene has entirely changed. The 
pioneer and isolated farmer is now found only in a few 
out-of-the-way places; he is out-of-date and unusual. Ap- 
proximately one half of the people of the United States are 
living under urban conditions. The typical farmer of to-day 
no longer does blacksmithing, carpentering, . butchering, 
transporting, hunting, or police duty. He exchanges much 
that he produces on the farm for other products made else- 
where. The railway, the express, the telephone, good 
roads, the automobile, rural mail delivery, and a multi- 
tude of other modern instrumentalities, have destroyed the 
isolation so characteristic of earlier America; they have 
also transformed the economically independent American 
into the economically interdependent American. A big 
railway strike would bring hunger and privation to the 
doors of millions of homes. Even a street railway tie-up 
is sufficient to throw the business of a city into disorder. A 
coal strike involving a large number of miners would direct 
a heavy blow at the industries of the nation. 

The Complexity of Modern Life. The intricacy of the 
industrial life of to-day becomes evident if we stop to con- 
sider the processes by which we ordinarily and regularly 
obtain almost any of the commodities which are offered in 



22 ELEMENTARY ECONOMICS 

the markets of our city or town. We find, for example, 
on the breakfast table in the morning an orange grown in 
California. This orange was grown on a fruit farm. The 
farm was owned by the farmer operating it ; but he is pro- 
tected in his right to private ownership by the strength of 
organized government. His deed to the land is recorded 
by a county official, and the owner cannot be arbitrarily 
dispossessed of his land. He expends money and effort 
upon the fruit farm because he knows that society, through 
its governmental machinery, is prepared to protect his 
property from the illegal acts of others. I 

The fruit grower cultivates the land and sets out the 
orange trees. He uses many tools and implements ob- 
tained from many different sources and involving the effort 
and ability of many different people. The oranges develop 
in due time and are picked and crated. The crates are 
transported to the railway depot by means of horses and 
wagons or automobile trucks. Again, it must be noted 
that many people — mechanics, woodworkers, miners, and 
others — were concerned in the production of the wagons 
or the automobile. The oranges are transported to your 
city or town. The railway employees are a host of workers, 
— engineers and other trainmen, switchmen, clerks, depot 
workers, section men, and many others. And, remember, 
the railway was constructed, the tracks laid, the rails fash- 
ioned, the locomotives and the cars built, the coal provided, 
and the signaling devices manufactured by still other workers, 
some of whom worked years ago. The rates charged by 
the railway are regulated by governmental officials. Rail- 
way securities are bought and sold on the stock exchange. 
Almost all kinds of industry are directly or indirectly con- 
nected with the railway business. 



INDUSTRIAL PROGRESS IN THE UNITED STATES 23 

The crates of oranges are often consigned to a wholesale 
fruit merchant who sells them to the grocer or retail fruit 
merchant, and the latter in turn sells and delivers to your 
home the orange which is found on your breakfast table. 
The oranges are paid for by the use of money or of a check. 
Money necessitates a government mint or printing estab- 
lishment; the check signifies a well-organized banking 
system. Both, the money and the check, and indeed the 
whole business mechanism, imply the reign of law and order ; 
both indicate the existence of courts, police systems, and 
organized government. 

Industry — business — to-day is a very complex piece 
of social machinery, carried on for the purpose of satisfying 
human wants. Each individual is directly or indirectly 
served by a multitude of individuals living and dead. And 
in turn each worker produces articles or services which may 
go to many different people in widely separated places. 
The oranges of the fruit grower finally reach many different 
people located in all the cities and states of the United States 
and perhaps also in foreign countries. 

If the student will attempt to follow through a similar 
process in the case of a loaf of bread, a bottle of ink, a steel 
rail or a watch, the intricacy and interdependence of modern 
industry will again be clearly revealed. The bread upon 
the dining-room table, the plates, the table itself, the house 
in which you live and the school building in which you are 
studying, — all are the products of the work of hundreds 
and thousands of persons interested in earning a living for 
themselves and their families. But, in spite of the com- 
plexity of modern life, the motive forces which lead to activity 
in the case of the pioneer farmer or of the routine worker 
in the modern factory are in essence not greatly dissimilar. 



24 ELEMENTARY ECONOMICS 

Our participation in the Great War has taught even the 
most careless and unthinking person that the individual ^ 
must be restrained in the interest of the group. Extra va- ^ 
gance, waste, inefficiency, and idleness are of vital national 
import. The world has been brought face to face with 
the specter of a world famine. The easy optimism which 
declared that the steam engine and modern science made a 
famine impossible is now discredited. The old fundamental 
truth that everybody, rich or poor, should do some useful 
work has come into the foreground. War and a period of 
national stress make it clear that the idler is a parasite and 
a social nuisance. 

TOPICS FOR DISCUSSION 

1. Contrast the living conditions of the pioneer farmer with 
those with which you are familiar. 

2. Trace the business activities involved in the delivery of milk 
each morning. 

3. Which kind of work is preferable, — that of the shoemaker, 
working with hand tools, or of the machine tender in a modern shoe 
factory? Why? 



PART II 

FUNDAMENTAL ECONOMIC CONCEPTS 



CHAPTER III 
THE PRODUCTION OF COMMODITIES 

Why Business Is Carried On. In the normal times of 
peace, the great majority of the men and women of the 
United States are workers, — in shops and factories, in 
stores, in offices, on railways and steamships, on the farms, 
in the homes, and in many other work-places. In the study 
of economics, we are interested in the work of the world 
or, in other words, in the business activity of the com- 
munity or of the nation. Why is business carried on? 
Why do so many people work hard day after day, year in 
and year out? The great majority of people work to get 
a living or a living plus a variety of commodities and serv- 
ices which make life comfortable and enjoyable. Unfor- 
tunately, the typical worker does not enjoy his work. He 
is anxious for the whistle to blow at night; and he dis- 
likes to hear it in the morning. One of the big unsolved 
industrial problems is that of substituting joy in work for 
the prevalent disinclination to produce. 

Under present conditions in industry, men work in order 
to satisfy their wants or desires. This is the primary or 
fundamental reason for business activity. As has been 
indicated, these wants are many and varied. They range 
from the desire for bread and butter to sustain life to the 
desire for personal adornment; and from the desire for a 
simple plaything on the part of the child of poverty to the 
multi-millionaire's craving for the magnificent yacht. Men 
work — business is carried on — in order to supply these 

27 



28 ELEMENTARY ECONOMICS 

multitudinous wants of the people of the nation and of the 
world. Business in your town or city or state is carried on 
for the purpose of producing commodities or services which 
people desire and will purchase. Barbers, photographers, 
lawyers, merchants, farmers, milkmen, and carpenters 
work — do business — because people pay them for doing 
so, because by working they are able to earn a living, because 
in this way they can obtain the purchasing power by means 
of which their desires may be satisfied. 

Business means teamwork; each worker, manual or 
mental, skilled or unskilled, has his own particular job and 
his place and manner of doing work. Each worker, from 
the humble and most unskilled to the most capable and 
skillful, is doing a part of the great whole which may be 
termed the " world's work." In order that all these various 
workers may do the work fairly efficiently and effectively, 
in order that the goods and services that consumers want 
rather than those which are not desired, may be produced 
and distributed to the consumers, capable directors, who 
may be named enterprisers, are essential. It is the function 
of the enterpriser to ascertain and supply the wants of 
consumers. The enterpriser is a big or little captain of 
industry. 

Business activity is directed by the capable enterpriser 
so as to produce the commodities and services which satisfy 
the wants — good, bad, or indifferent — of the purchasers 
or consumers. The desire for intoxicating liquors has built 
up a great business. The desire for candy and the desire 
for breakfast foods have likewise caused important busi- 
nesses to thrive. Business men cater to the bad as well 
as to the beneficial demands of consumers. The urge for 
profits often drives men to do that which they know is 



THE PRODUCTION OF COMMODITIES 29 

socially undesirable; but by so doing they make a living 
and, perhaps, more than a living. On the other hand, when 
the want or desire for a product disappears, the business of 
catering to that desire stops. 

Exchange. At the present time nearly all workers are 
paid in money. With this money they purchase the com- 
modities which they want, — food, clothing, shelter, amuse- 
ments, and many other items. In primitive and even in 
more recent pioneer days, very little money was used. 
There was little buying and selling; and many of the ex- 
changes were accomplished without the aid of money. 
The few things which the pioneer family did purchase from 
outside were nearly all paid for in grain or meat, or some 
other farm product. The pioneer came into possession 
of very little money. 

But to-day the average laborer, the worker you know, is 
a specialized worker and he receives wages for his labor. 
Even the farmer sells nearly everything he produces for 
money, and with the money buys the many tools, the cloth- 
ing, the wagons, and even much of the food that he and his 
family need. Some workers to-day are shoe factory em- 
ployees; others are furniture makers, carpenters, railway 
trainmen, expressmen, milkmen, farmers, miners, actors, 
teachers, and so on through a long list of occupations. 
Practically all these classes of workers work for wages, fees 
or profits which are paid to them in money ; and in turn they 
use the purchasing power which the money gives them to 
buy the sundry commodities and services which they want 
or desire. The shoe factory worker, for example, makes 
shoes or parts of shoes for people living in many different 
places, for persons he has never seen and probably never 
will see. In turn, a great multitude of workers of various 



30 ELEMENTARY ECONOMICS 

professions, trades, and occupations aid in making the goods 
and performing the services which the shoe factory worker 
purchases with his wages. Each wage earner and each 
professional man works for many people; and a vast army 
of workers toil for you and for your friends ; that is, a host 
of people make the commodities and perform the services 
you and your friends purchase with the money which you 
and your friends obtain directly or indirectly as wages, or 
as income from property. 

Business is a great cooperative affair. Farmers, lumber- 
men, factory workers, storekeepers, railway employees, 
lawyers, bankers, actors, teachers, — all are working to 
satisfy their mutual wants. Thousands of men and women 
in this and other countries have been working last year, 
yesterday, to-day, in order that you and other persons in 
your town may have to-day the necessities, comforts, and 
pleasures of life. And each worker has contributed his 
mite to the great mass of products and services which make 
up the income of the nation. " Each is working for all ; 
all are working for each." It can readily be seen that the 
pioneer farmer toiled for each and every member of his 
family; it is also clear that the wife and mother did like- 
wise. If the farmer were lazy and inefficient, the family 
income evidently would be small. The family would suffer 
because of the small output of the farm. It is as true, but 
not so easily comprehended, that idleness, inefficiency, and 
useless work reduce the sum total of the national income 
or dividend. National prosperity, comfort, and happiness 
require efficiency. From this point of view, the nation is 
the pioneer family written in larger letters. 

Income can also be obtained by individuals in other ways 
than through business activity. The owner of land or of 



THE PRODUCTION OF COMMODITIES 31 

capital may derive an income by allowing others to use his 
property. But such income can be paid to the inactive 
owner only because some one else does utilize the land or 
the capital in some kind of business activity. Payments 
are made to inactive owners only because the capital and 
land are important aids in production. The satisfaction 
of the wants or the desires of the inactive income receivers 
as well as of the active producers is a normal result of busi- 
ness activity. The original sources of both incomes are 
the same. 

Classification of Industries. Industries may logically be 
arranged in five general classes : extractive, transforming, 
transporting, exchanging, and personal service. The ex- 
tractive industries are those which obtain material out of 
which useful articles are made. These may be te med 
primary industries. The chief extractive industries are 
agriculture, mining, fishing, and lumbering. Manufacture 
of all kinds transforms the raw material furnished by the 
extractive industries. Material is made more useful and 
more valuable by changing its form. Manufacture, for 
example, changes crude iron ore such as comes from the 
mine into the hairspring of a watch or into a steel rail. 
The transporting industries convey goods, persons, and 
intelligence from one place or locality to another where the 
need is greater, and in this way aid in satisfying wants and 
desires. The chief means of transportation are the railway, 
automobile trucks or passenger cars, water and air vehicles, 
pipe lines to convey water, gas, and oil, telegraph and tele- 
phone wires, lines for the transmission of electrical energy, 
and the wireless telegraph and telephone. 

The work of the exchanging industries is that of aiding 
other forms of industry in getting goods into the hands 



32 ELEMENTARY ECONOMICS 

of the consumer; the exchanging industries facihtate the 
change of ownership of commodities. The chief exchanging 
industries are wholesale and retail stores of all kinds^ and 
banks. The personal servant performs services instead 
of aiding the flow of material commodities toward the con- 
sumer. Among those performing personal service may be 
mentioned barbers, physicians, teachers, preachers, lectur- 
ers, actors, and domestic servants. 

Essentials of Big Business. The student should see 
clearly that good transportation facilities are essential to 
big business. Railways make it possible for a factory to 
sell its goods in distant places. Railways allow extensive 
markets to come into existence, which in turn lay the founda- 
tions upon which large business enterprises are built. The 
effect of improved transportation upon the market for wheat 
is well illustrated by a computation made before the opening 
of the Great War. The price of wheat in the market was 
assumed to be one dollar per bushel. By wagon over the 
ordinary highway, the expense of transportation for 300 
miles was estimated to be equal to the price of wheat at the 
market. Over the modern railway, the expense of trans- 
porting wheat 7000 miles, or twenty-three times as many 
miles, was calculated to equal the market price. A farmer 
of to-day producing wheat has a much wider range of pos- 
sible markets than did the farmer of the pre-railway period. 
Without excellent transportation facilities, our grain could 
not be grown in the West, our collars manufactured in 
Troy, New York, or our breakfast food prepared in Battle 
Creek, Michigan. 

The inventions and improvements in transportation are 
not the only essential factors in developing large-scale busi- 
ness. The substitution of the power of coal and of falling 



THE PRODUCTION OF COMMODITIES 33 

water through the use of steam and electricity for the mus- 
cular power of men and animals is necessary in order to 
make the wheels of the factory go around. In big business, 
turning, carrying, and lifting must be done by some other 
power than man-power. Labor-saving devices and natural 
— non-human — power are two prime essentials in modern 
large-scale industry. Modern industry and present-day 
civilization are, in a large degree, machine-made. 

An article which can be profitably produced by large- 
scale methods must be one which many persons desire to 
purchase. No matter how excellent the transportation 
facilities may be, an article desired by only a few persons 
will be produced only by small-scale methods. Again, the 
demand for an article must be to a considerable degree 
standardized before large-scale manufacture becomes profit- 
able. A tailor-made suit of clothes, made according to 
the measurements of one individual, is usually made in a 
small shop. Ready-made clothing and overalls are usually 
made in a factory. In the first case, each unit is made 
differently ; in the second example, the product is standard- 
ized within a certain class or group. The familiar Ford 
automobile is an excellent example of standardization. The 
manufacturer has developed only one type of machine. 
Parts made in Detroit may be shipped to other cities and 
there assembled. Standardization and interchangeability 
of parts are characteristics of large-scale business. 

Articles which cannot be standardized, such as tailor- 
made clothing, or commodities for which the demand is 
small, such as expensive jewelry, will continue to be made 
according to small-scale or handicraft methods. Portrait 
painting and the production of arts-and-crafts goods are 
small-scale businesses. Cooking and laundering are in 



34 ELEMENTARY ECONOMICS 

the process of being transferred from small-scale to large- 
scale industries. Agriculture is, with few exceptions, still 
in the small-scale stage. 

TOPICS FOR DISCUSSION 

1. Write a brief description of an ordinary day's work performed 
by some person you know. 

2. Why was the day's work performed? 

3. Were the results beneficial to others than the person doing the 
work? 

4. Make a list of fifty different occupations. 

5. Arrange these fifty occupations into five groups on the basis 
of similarity. 



CHAPTER IV 
WANTS AND VALUE 

Why Do People Want Commodities? Since business is 
carried on in order to enable men and women to satisfy 
their wants, we must next consider human wants. Why tio 
people want commodities and services? Do all have the 
same wants? Are wants always the same in different 
times and places? Certainly different people have quite 
different wants. No two • persons have exactly the same 
wants or desires. Moreover, the demands of any one 
person vary from time to time and with change of habita- 
tion. As a person grows older certain desires which were 
strong in youth fade and give place to others. Again, our 
wants are somewhat different in summer from those of the 
winter season. It is this variety and constantly shifting 
character of wants which give rise to the multiplicity of 
business, and to the ever-changing nature of business. 

To answer the question — Why do people want com- 
modities and services ? — is more complex and difficult. 
The satisfaction of certain wants is absolutely necessary. 
Food, clothing, and shelter are in some degree necessary in 
this climate. But only a small portion of the business 
activity of the United States or of any other civilized nation 
is directed toward producing the minimum necessities for 
the maintenance of life and vigor. We seek comforts and 
luxuries ; we desire not only food, but food well cooked and 
daintily served. Clothes of a certain style, without much 

35 



36 ELEMENTARY ECONOMICS 

regard for the practical matter of warmth, are demanded; 
and more are wanted than were considered necessary by 
the pioneer. Dress suits, party dresses, neckties, Hnen 
collars, jewelry, and so on, through a long and constantly 
changing list, are purchased. Houses with modern con- 
veniences are in demand. Men and women of to-day want 
not only bread and butter but also "jam on the bread " ; 
they wish not merely clothes but stylish clothes; they ask 
not only for shelter, but for a house which is as good as 
that belonging to their friend. Many wants are purely 
conventional. We want certain commodities because others 
have them, because it is the style, or because the ownership 
indicates that we have a large income. Business men cater 
to these wants and often stimulate them through judicious 
advertising. 

Utility. The quality which makes goods or services de- 
sirable is designated utility, and is to be found in all com- 
modities which men and women seek. Air, water, bread, 
a suit of clothes, tobacco, — all possess utility ; these arti- 
cles are serviceable, and are desired by men and women. 
Of course, individual tastes differ. Certain commodities 
may possess no utility in the estimation of one person and, 
on the other hand, be considered to possess utility by another. 
A canceled postage stamp may possess utility for the stamp 
collector ; but for others it may be without utility. 

Our wants for a given article change as we obtain and 
consume additional units of the commodity. To a hungry 
man the first slice of bread consumed gives great satisfac- 
tion. The second slice gives slightly less ; and the third still 
less. If the man continues to consume slice after slice, 
presently his desire for bread will be satiated. He will 
crave no more for the present; and to continue consuming 



WANTS AND VALUE 37 

bread would soon bring discomfort. This phenomenon of 
diminishing desire or of diminishing utihty is also found in 
connection with commodities other than food. We want 
one house very much ; but few of us have great desire for 
a second for our own use. The second hat has less utility, 
it satisfies a less intense desire than the first, and the third 
has much less utility for us than the second. As a conse- 
quence, when the supply of a given article is greatly in- 
creased, the tendency is to use it to satisfy less and less 
intense wants. Salt is quite plentiful. It is utilized not 
merely to satisfy the intense wants of human beings in 
cooking; but it is also used for many other less important 
purposes, — for example, in connection with the manufacture 
of ice cream. If salt were much less plentiful, it would not 
be used for the latter purpose. Sometimes an article pos- 
sessing utility may become so plentiful that it is no longer 
serviceable. Water in a time of flood possesses disutility 
rather than utility. 

Consumption gives greater satisfaction when a variety 
of goods are consumed than when the consumer is restricted 
to a small range of choice. A dinner of bread, butter, and 
potatoes will be less gratifying than one in which a greater 
range of choice is offered. The pioneer was obliged to be 
content with very little variety in his selection of consum- 
able commodities; but industrial advance and improved 
transportation facilities make possible a greater variety. A 
wide range of choice tends to increase the well-being of the 
community. In order to obtain the greatest possible satis- 
faction from consumable goods, attention must also be given 
to the "law of harmony." In order to obtain pleasing 
results in art, architecture, or painting, harmonious colors 
and materials must be selected; the same holds true in 



38 ELEMENTARY ECONOMICS 

I 

regard to the more common and prosaic matters, — such 
as, for example, in the selection of food and clothing. 

Why Are Land and Capital Desired? It is clear that 
consumable goods such as food and clothing are wanted 
because of the satisfaction afforded by their consumption. 
But land and capital goods such as tools, machinery, factory 
buildings, are not consumed ; no wants are directly satisfied 
by these commodities. Why then do men and women desire 
capital goods? Why do they purchase non-consumable 
commodities ? Land and capital are instrumentalities which 
give assistance in producing commodities and services which 
people desire for purposes of consumption. We work and 
play upon land, — the earth's surface. Land is desirable 
when it is advantageously located for business, residential, 
or recreational purposes. Land is needed in all kinds of 
business, — agriculture, manufacturing, merchandising, rail- 
roading. The airship needs a considerable area of land for 
the beginning and the safe ending of a flight. Land is needed 
for playgrounds, athletic fields, parks and race tracks. 
Land is valuable because it does not exist in unlimited quan- 
tities and because it must be had to enable men and women 
to do their daily work and enjoy their daily pleasures.^ 

Capital goods consisting of such articles as factory and 
store buildings, tools, machinery, railway tracks, and steam- 
ship docks, when properly utilized, enable the workers of 
the world to produce more than could be produced without 
their assistance. Capital goods have value and may be 
bought and sold on the market, for the reason that such 
goods are scarce and because desirable consumable goods 
and services come into being as a result of the utilization 
of capital goods. Capital goods are valued because of the 

1 Further discussion of this point will be found in Chapter VI. 



WANTS AND VALUE 39 

assistance given by such goods in the production of con- 
sumable commodities. 

Value. Business men are interested in producing goods 
or services which have value or which in the usual course 
of events can be bought and sold at a market price. Com- 
modities which have value always possess two characteristics : 
there is an effective demand for them, and they are not found 
in sufficient abundance to satisfy all desire for them. An 
effective demand is demand supported by purchasing power. 
Briefly stated, valuable commodities possess utihty or the 
power to satisfy human wants, and they are scarce. Com- 
modities which persons desire but which are plentiful in 
amount are free goods. Air, under ordinary conditions, is 
a free good. Business men are not concerned with the 
production of free goods. Water in the form of rain is a 
free good; but water passing through irrigation ditches in 
the arid regions is scarce. It possesses value. 

The problems of economics relate to questions of value. 
It has been stated that the business man is interested in 
the production of values rather than in the production of 
goods. Yet ultimately the important matter from the 
point of view of human good or social welfare is the pro- 
duction of goods and services instead of the creation of 
values. Here is uncovered a fundamental cause of an- 
tagonism between the aims of the business world and the 
demands of men and women as consumers of commodities. 
It is a matter of common knowledge that the total money 
value of the wheat crop of the nation in a year of small 
crops may be greater than in a year of abundant harvests. 
The monopolist usually restricts his output of the monopo- 
lized article in order that the price of each unit may be 
enhanced and his total profits increased. But the interests 



40 ELEMENTARY ECONOMICS 

of the monopolist and those of the consumer are by no means 
harmonious. The consumer wishes abundant harvests and 
a plentiful supply of the products of farms, mines, and 
manufactories. Value signifies scarcity; but scarcity is 
the bane of the consumer. In a time of national stress 
such as the United States faced in 1917, speculators found 
it to their advantage to allow carloads of potatoes to freeze 
or go to waste in some other manner; but the people of 
the nation were able clearly to see in that emergency that 
such business methods were inimical to the welfare of a world 
needing foodstuffs. 

While it is true that business is carried on to satisfy human 
wants, it is also true that the prime object of the individual 
business man is to earn a living for himself and family, 
that is, to make profits. But profits can only be made in 
the business world by supplying something which men want 
and are able to purchase. If the production of a small quan- 
tity of a given commodity will result in larger profits than 
the production of a large quantity of the same article, the 
business man will unhesitatingly choose the former course. 
He considers himself to be a business man, not a philan- 
thropist. His primary concern is for himself and his 
family rather than the welfare of that indefinite mass called 
the general public. It is this socially unfortunate situation 
which has led to the passage of laws regulating railways 
and other industries, of pure food laws and regulations in 
regard to weights and measures. These laws and regula- 
tions aim to mitigate the evils arising because of the antag- 
onism between profit-making and commodity-making. 

The value of a commodity is expressed in terms of another 
commodity. Two bushels of oats may be equal in value 
to one of wheat, or a pound of butter may exchange for one 



WANTS AND VALUE 41 

and one half dozens of eggs. We are considering value in 
exchange ; and exchange value is always a ratio. If the 
value of one commodity in terms of another goes up, the 
value of the second in terms of the first is lowered. If the 
exchange value of oats for wheat changes from two to one, 
to three to one, the value of wheat measured in oats has 
risen and the value of oats in terms of wheat has fallen. 

Price. Price is a form of exchange value. It is the value 
of a commodity in terms of money, or in this country in 
terms of gold, which is our standard money. If wheat is 
selling at a dollar a bushel, the exchange value of wheat in 
terms of gold is equal to the amount of gold in a gold dollar. 
Market prices are, then, simply the exchange values of 
commodities in terms of one commodity, gold, used as money. 
The price of an article tends to fall in a given market when 
the supply of the article offered on the market or likely to 
be offered increases, or when the demand for the article 
decreases; the price tends to rise when reverse conditions 
obtain. The general level of prices — the average price 
of all commodities — may fall or rise as the value of gold 
rises or falls. In recent years, the quantity of gold avail- 
able has rapidly increased, — faster than the demand for 
gold — and the value of gold has fallen. Or, in other words, 
the general level of prices of commodities has risen. 

The price of a given commodity, for example, of a bushel 
of potatoes, cannot, year after year, fall below the expense 
of producing a bushel of potatoes. If the price should fall 
below that level, and remain below for any considerable 
length of time, many farmers would cease raising potatoes. 
The supply would soon be reduced and presently the price 
of potatoes would rise. On the other hand, as the price of 
potatoesrises, consumers begin to economize in their use 



42 ELEMENTARY ECONOMICS 

and substitutes are purchased. As a consequence, the 
demand for potatoes is somewhat reduced, thus tending 
to prevent further rise in price; and, secondly, farmers are 
Ukely to grow more potatoes, which in turn tends to check 
the rise in the price of potatoes. Price is fixed by the de- 
mand and supply on the market; but the upper limit is 
practically determined by the effective demand of purchasers 
for the given commodity, and the lower limit is fixed, except 
temporarily, by the expense of producing the commodity.^ 

TOPICS FOR DISCUSSION 

1. Give a list of the wants of a six-year-old child ; of a man ; 
of a woman. 

2. What are some of the things you want because you are not 
living in an isolated place ? 

3. Why do you want those articles? 

4. Could an article have value unless desired ? Unless scarce ? 

5. Farmers sometimes accept three cents a quart for straw- 
berries. Why ? Would they continue to grow strawberries if they 
never received more ? 

6. Show that all commodities are not equally necessary to the 
support of human life. 

1 In this simple explanation, no account has been taken of the fact that 
various producers have quite different expenses of production and that con- 
sumers have very different demanding power. Of course, the market price 
of an article often temporarily falls below the expense of producing it. 



CHAPTER V 
DIRECTION OF THE WORKERS OF THE WORLD 

The National Income Equals the Production of the Nation. 
Omitting from consideration such exceptional methods of 
getting income or purchasing power as stealing, gambling, 
or accepting gifts, — and these three methods of getting 
an income spell subtraction from the income of some other 
person, — personal incomes may be classified under four 
headings: wages, interest, rent, and profits. It is not 
desirable in an elementary textbook to give place to a dis- 
cussion of the many theories which have been advanced 
in regard to wages, interest, rent, and profits ; but some 
attention will be paid to certain practical considerations 
which determine the magnitude of these shares in the 
national wealth. 

The total amount of the four forms of income plus the 
net income from businesses such as the post office and 
municipal plants, operated by the governmental units, equals 
the entire income of the community or of the nation.^ It 
also is equal to the entire production of the community or 
of the nation, less an allowance for wear and tear upon the 
machinery and equipment used in business, called depre- 
ciation. A great exchange takes place in our market places. 
The people of the United States produce in a given year a 

1 The expenditures of our governmental units are chiefly derived by- 
means of taxation, but taxes are deducted from the income of individuals. 
See Chapter XXII. 

43 



44 ELEMENTARY ECONOMICS 

vast amount of grain, coal, clothing, lumber, brick, pianos, 
jewelry and so on through a very long list. These com- 
modities have market prices; and we may calculate the 
entire money value of everything that is produced within 
our national boundaries. Disregarding foreign trade and 
investments abroad and the like, this total is also equal to 
the mone}'^ value of wages, rent, interest, and profits. In 
order to make this point clear, let us center our attention 
upon one factory. The total annual income — the gross 
receipts — is equal to the sale price of everything produced 
within the factory during the year. After deducting the 
expense for raw materials, insurance, and the expenditure 
for repairs and depreciation of the plant, the remainder may 
be called the net product of the plant, considered as a unit. 
This net product will be divided among four different groups 
of persons: the wageworkers in the plant, the owners of 
the capital employed, the owners of the land upon which 
the plant stands, and the managers of the business. That is, 
the total net product, or more accurately the money value 
of the net product, will be divided into wages, interest, rent, 
and profits. Of course, one individual may receive income 
from more than one of these four sources of income. For 
example, the owner of capital — a bondholder — may also 
be the manager of the plant. What holds good for one 
plant is also true of many and of the nation considered as a 
unit. If the manager of a manufacturing enterprise is able 
to increase through more efficient methods the total pro- 
duction of the factory, the total amount to be distributed as 
wages, interest, rent, and profits will, therefore, be increased. 
Likewise, the total production of the nation may be in- 
creased and the sum total of wages, interest, rent, and 
profits paid within the nation increased in the same ratio. 



DIRECTION OF THE WORKERS OF THE WORLD 45 

The student may, perhaps, get a better understanding of 
the situation if a small isolated island peopled with, say, 
one hundred persons, be carefully studied. Whatever holds 
good on the small island also is true in the bigger world. 
If one half of the people on the island are idlers, the total 
production is reduced below the normal amount, and the 
total to be distributed in wages, interest, rent, and profits 
will be reduced. Poverty will be the lot of many. Idlers 
and useless workers are likewise undesirable in the larger 
world in which we live. To hire men, paying good wages, 
to carry stones across a road and then back again is foolish 
and wasteful when streets might be paved by utilizing the 
labor power of the same group of workers. 

The Consumer and Business Enterprise. Every person 
who makes a purchase helps to decide what the workingmen 
of the country will produce. When you decide to buy a 
pair of gloves with your two dollars instead of a pair of 
skates, you help to determine how many workers shall be 
employed in glove-making and how many in skate-making. 
Your money measures your purchasing power; and in- 
dividuals possessing purchasing power determine what shall 
be used. If many men buy beer or cigars, instead of neck- 
ties or shoes, business managers will hire more men and 
obtain more capital to produce beer and cigars, and a smaller 
number of men and less capital will be employed to manu- 
facture neckties and shoes. As has been pointed out, in- 
dustry is primarily carried on to produce the commodities 
and services which men and women with purchasing power 
want. 

The enterpriser or the manager of a business organiza- 
tion actually makes the decision in regard to how many 
units of a given article shall be produced per week in the 



46 ELEMENTARY ECONOMICS 

plant; he also determines in what manner it shall be pro- 
duced. However, the decision made by the enterpriser is 
in turn dependent upon the demands of the consuming 
public. If the enterpriser persists in manufacturing an 
article or a particular variety of article which the consumer 
no longer, for some good or some inadequate reason, wishes 
to purchase, his business will cease to be profitable. Ad- 
vertising and soliciting are methods of inducing the consumer 
to* use certain products. The consumer ultimately deter- 
mines the course of productive activity; but the consumer 
may be " educated " by skillful salesmanship. The judicious 
advertising of certain breakfast foods, kodaks, and motor 
cars is indicative of the importance to manufacturers of 
appealing to the consuming public. The politician and the 
salesman are both looking for votes : the former for a 
given man or group of men to be delivered at the ballot box ; 
the latter for a given product, the vote to be delivered over 
the counter of the salesroom, the grocery store, or the meat 
market. 

Savings. Saving is merely directing the workers of the 
world to produce capital goods — tools, machines, loco- 
motives, factory buildings, etc., — instead of those consum- 
able goods which we eat or wear or use up in some direct 
fashion. When savings are referred to, money savings are 
usually in mind. But money is not " saved " except by 
the miser who buries coin in the ground or hides it under 
the carpet. The person who puts his savings in a savings 
bank does not actually " save money." Much fallacious 
reasoning may be found in this connection. If we try to 
understand what actually happens, it is not, however, 
difficult to see what saving really is. 

When savings are placed in a savings bank the depositor 



DIRECTION OF THE WORKERS OF THE WORLD 47 

decides not to spend all of his income on food, clothing, 
shelter, and recreation, that is, for consumable goods and 
services. Because he can get an additional return at the 
end of the year — interest — for his savings, he decides to 
place them in the bank. But savings are purchasing power. 
The bank again loans these savings or this purchasing power 
to some enterpriser, to an individual or company engaged 
in business. The enterpriser uses this purchasing power, 
not to buy food or clothing or shelter, but to purchase tools, 
machinery or a factory building. A farmer may build 
fences or a barn as a consequence of saving. A portion of 
the money income which he receives from the sale of his 
farm products — wheat, corn, potatoes, etc., — is used to 
buy lumber, other building material, and labor. Again, in 
this case, saving merely changes the direction of the pro- 
ductive effort of business enterprise from consumable goods 
to capital goods. The maintenance and the increase of 
the capital goods of a nation are results of saving. 

Savings mean the employment of more workers in pro- 
ducing capital goods — tools, machines, railways, and the 
like — and less in producing consumption goods — candy, 
food, luxuries, etc. Saving changes the direction of world's 
workers into new channels. Savings, except for the miser, 
are not stored-up money or other articles. From another 
point of view, saving is a transfer of the right to purchase 
to some other individual or company for a return called 
interest. 

Luxury and Waste. Wasteful consumption causes the 
misdirection of the activities of the workers of the world. 
It means that workers are directed to produce luxuries for 
ostentatious display or to satisfy the whims of certain 
individuals possessing purchasing power. Wasteful con- 



48 ELEMENTARY ECONOMICS 

sumption causes a reduction in the amount of necessities, 
of comforts and of capital produced. Purchasing power to 
the extent, perhaps, of a bilHon or more dollars per year 
has been wasted in the United States alone on " luxury, 
show, and vice." Such useless waste is one of the reasons 
for poverty and for the large mass of ill-to-do in this great 
" prosperous " nation. 

If a flood destroys bridges and houses, it will be necessary 
to employ men and utilize materials to replace the destroyed 
structures. Of course better houses and better bridges may 
replace those carried away by the water; but, if there has 
been no destructive flood, the materials and the work of 
the men might have been used to build other and additional 
buildings, to pave streets or construct railways. And, as 
a result, the community would be better equipped. From 
this broad social or national point of view which looks upon 
the community or the nation as an owner would upon his 
plantation or his factory, destruction of property by fire, 
flood, or tornado is not to be desired. But from the point 
of view of certain business men in the community, it may 
be called a blessing. The merchant who sells window glass 
may find his profits enhanced by a severe hailstorm; and 
the plumber may have extra work because of an unusually 
cold snap. War, the most destructive of all world calamities, 
makes huge profits for the manufacturer of munitions. Here 
again social welfare and individual or special interests run 
counter to each other. The liquor interests, for example, 
insist upon their right to do business even though it has 
been conclusively proven that the consumption of liquor 
is inimical to social welfare and national efficiency. 

Expenditures for luxuries are often justified by the argu- 
ment that such demands make work for many wageworkers 



DIRECTION OF THE WORKERS OF THE WORLD 49 

who otherwise would be idle. This '' make work " doctrine 
has been so generally accepted and so persistently put forth 
that it is worth while to consider the matter briefly. If 
workers are set to producing orchids, they cannot grow 
potatoes or wheat. If hundreds of wage earners are foot- 
men and valets, these workers cannot be used to make cloth- 
ing, shoes, foodstuffs, or houses. Another reference to the 
small island may make the problem clearer. If a large 
fraction of the total number of workers on the island are 
engaged in producing luxuries, the amount of necessities 
and comforts produced must be necessarily reduced below 
the amount which might be anticipated if a smaller number 
were workers of this type. Indeed, a condition might easily be 
reached in which the majority of the islanders were in abject 
poverty while a few rich were being surfeited with luxuries. 

The exigencies of the great war into which the United 
States was forced in 1917 soon taught the American people 
that many forms of expenditures must be curtailed in order 
that munitions, ships, aeroplanes, and food might be pro- 
duced in sufficient quantities to insure success in the great 
struggle. But, it is also true in times of peace, that ex- 
cessive expenditures for luxuries may mean a deficient 
production of necessities and comforts. The community, 
the city, the nation, or the generation which devotes a large 
share of its energy to satisfying cravings for fine clothing, 
costly food, cabarets, theaters, and expensive jewelry must 
go without the fine architecture, good roads, great libraries, 
and art galleries which would be available for a more frugal 
people with less expensive tastes and who placed less empha- 
sis upon purely personal and fleeting pleasures. 

Individuals engaged in the business of producing luxuries 
will suffer temporarily when a sudden curtailment of such 



50 ELEMENTARY ECONOMICS 

expenditures occurs. The entrance of the United States 
into the war adversely affected the jewelry business; but, 
in the long run, workers in a declining industry will go into 
other lines of work. The florists and their assistants might 
readily become market gardeners. The makers of very 
expensive garments could without great difficulty produce 
cheaper grades of clothes. As long as there is a scarcity of 
necessities, curtailment of expenditures for luxuries can be 
justified. However, some expenditures for things of beauty 
and refinement are doubtless desirable and make for human 
progress. The evil lies in excessive or conspicuous waste or 
luxury. The whole problem finally reduces to one of di- 
rection of the energy of the world's workers. 

The Rights and Duties of the Consumer. Business prin- 
ciples in regard to the advertising and selling of wares are 
changing. The old saying, '^ Let the buyer beware " was 
founded upon the idea that the misrepresentation of goods 
to the purchaser was good business. The coming of the 
carton, the use of the original package unopened from manu- 
facturer to consumer, and the one-price, money-back-if- 
you-are-not-satisfied method of selling goods, are transform- 
ing the making and selling of goods into something more 
desirable and honorable than a method of fleecing customers. 
The rights of the consumer are further safeguarded by pure- 
food laws and the like. Both the law and the new theory 
of business operate to protect the ultimate consumer, — 
and, since all are consumers, to protect the community. 

Much has been written and spoken about the rights of 
the general public — the great third party — in disputes 
between workingmen and their employers; but very little 
has been said about the duties of the general public as con- 
sumers who make up the public. It is time for an analysis 



DIRECTION OF THE WORKERS OF THE WORLD 51 

of the duty of the consumer. What may he be allowed to 
do with his purchasing power ? Is it in the interest of social 
welfare and human betterment that each and every person 
possessing purchasing power do with it exactly as he desires ? 
Now, as has been indicated, upon the direction of the pur- 
chasing power of the people depends the kind and quality 
of the output of the nation. If consumers are anxious to 
purchase large quantities of useless and harmful products, 
many workers and business establishments will cater to the 
demand. The spendthrift, the beer drinker, and the person 
who eats much meat are expensive persons to maintain. A 
person can be well fed at less social or national cost upon 
cereals and vegetables. Scientific selection of consumable 
goods is as important in national economy as efficient man- 
agement of labor and capital. 

Society is beginning to curb the enterpriser. He is re- 
stricted in a variety of ways by anti-trust laws, by labor 
legislation, by governmental regulation as of railways, and 
by other means. Society also restrains the workers. Laws 
have been placed upon the statute books in regard to strikes, 
boycotts, injunctions, arbitration and conciliation, social 
insurance, apprenticeship in certain trades. But the con- 
sumer, except as a war measure, has been subject to yery 
little legal control. Laws have been passed in regard to 
the consumption of intoxicating beverages and certain 
drugs; but beyond this short step little has been accom- 
plished. Nevertheless, the misdirection of consumption 
causes serious individual and social maladjustments. If the 
American nation can curb a large trust, why can it not re- 
strain the consumer who insists upon furnishing banquets 
to guests at a cost of $100 per plate, in a city filled with the 
victims of poverty and under-nourishment ? 



52 ELEMENTARY ECONOMICS 

The passage of graduated income and inheritance tax laws 
is a movement in the direction of curbing the consumer. 
By taking a portion of a citizen's income or inheritance, 
the government, representing society, the general public, 
or the nation, directs the purchasing power which otherwise 
would have been a matter of individual decision. 

Thus far only the total output of the nation has been 
considered. Now, the next problem is to analyze the 
division of the total income into the four factors : wages, 
interest, rent, and profits. With a given state of produc- 
tion, that is, with a certain amount produced in a year, 
what determines how much should go as wages, how much 
as interest, how much as rent, and how much as profits? 
This problem of distribution is perhaps the most difiicult 
and vital of all economic questions. 

TOPICS FOR DISCUSSION 

1. What are some of the articles widely advertised? 
[ 2. Distinguish between necessities and luxuries. 

3. Is the miser or the spendthrift the more desirable member of 
society? 

4. When you make a deposit in a savings bank, do you affect 
in any way business operations ? 



CHAPTER VI 
SHARES IN THE NATIONAL INCOME 

Wages. Wages are the price paid for labor ; salary is one 
form of wages. In economics the term " labor " includes all 
forms of human effort in the production of goods and services 
demanded by human beings. Labor includes the efforts of 
the unskilled toiler, the work of the trained physician or of 
the teacher, and the services of the bank president or the 
railway manager. The wage rate is actually fixed by means 
of a bargain between the worker and his employer. Labor 
is bargained for much the same as is sugar or steel. As is 
true of commodities, the wage rate tends to rise when the 
number of workers decreases or the demand for workers 
increases; and the wage rate tends downward when the 
number of workers increases or the demand for workers 
decreases. But labor power differs in certain important 
respects from an ordinary article of merchandise. The 
worker must go with his labor power ; labor power can be 
exercised only in connection with the body of the worker. 
Shop conditions vitally concern the seller of labor power, — 
the wageworker. The worker must also live near his work ; 
the sale of his labor power determines where he and his 
family must live as well as who his companions shall be during 
working hours. Again, labor power is a highly perishable 
commodity. To-day^s labor power cannot be sold to- 
morrow ; it must be sold to-day or it is wasted. 

The rate of wages paid varies greatly. At the bottom of 
the scale is the sweat-shop worker who receives a pittance 

53 



54 ELEMENTARY ECONOMICS 

of five or six dollars a week; at the top of the list will be 
found the captain of industry receiving a salary of $100,000 
or more per year. The workers of the nation may be roughly 
classified into four somewhat distinct groups, — the un- 
skilled, the skilled, the professional and highly skilled workers, 
and the industrial leaders or captains of industry. Each 
one of these large groups could be subdivided into several 
smaller groups. By far the larger number are found in the 
first group, and the unskilled receive the lowest wage. The 
fourth group consists of a relatively small number of highly 
paid workers. Between these groups, and, indeed, between 
subdivisions within a group, there is very little competition. 
The wage rate for each group is fixed in a large degree with- 
out reference to the rates paid for workers in other groups. 

Individual Bargaining. There are two kinds of wage 
bargains, individual and collective. When each worker, 
acting independently of his fellow workers, applies for work 
and agrees with his employer as to rates of wages and the 
conditions under which the former shall work, individual 
bargaining is utilized. Nearly all bargaining between 
workers in the professional group or in the upper working 
group is individual. The average worker of the unskilled 
or of the skilled groups is usually at a great disadvantage 
when he bargains individually with an employer of many 
workers. The seeker for employment cannot afford to lie 
idle; his family expenses continue while he is out of a job. 
The matter is of much importance, as a rule, to the worker, 
of greater importance than it is to the manager of the business 
needing another employee. To the latter, it is merely a 
question of one more or one less employee and a slight 
difference in profits. The employer of many workers is 
more skilled in bargaining than the worker ; and the former 



SHARES IN THE NATIONAL INCOME 55 

is usually well informed as to the labor market. Other 
workers can readily be found in normal times to do the 
routine work of the unskilled laborer. The skilled worker 
is in a less disadvantageous position; it is more difficult 
and costly to fill his position. 

In reality, the individual bargain made with the lower 
paid workers is a one-sided matter. The employer tells the 
seeker for work that he is paying so much for the kind of 
labor in question. The wage worker can take the wage 
offered or he can look further. Of course, if the employer 
finds it impossible to get all the workers he needs, the wage 
rate may presently be raised ; although employers are very 
loath to raise the level of wages. But the essentials of a 
real bargain are chiefly conspicuous by their absence when 
an individual unskilled worker confronts the typical employer 
of labor. 

Collective Bargaining. One of the chief objects of organ- 
ized labor is the substitution of collective for individual 
bargaining. In collective bargaining a representative of a 
group of workers bargains with the employer. The wages 
of the entire group are determined as the result of one 
bargain. In collective bargaining, the two parties stand 
much more nearly on a plane of equality than when the 
single worker meets his employer. The labor representative 
is usually a capable man who has had experience in the labor 
market; he is acquainted with the facts as to demand and 
supply. A failure to reach an acceptable agreement is a 
much more serious matter to the employer than in individual 
bargaining. The failure to make a bargain may result in a 
strike closing temporarily his shop, factory, or mine. 

Many employers refuse to bargain collectively with their 
employees. Various reasons are offered for such refusal. 



56 ELEMENTARY ECONOMICS 

but the real reason is usually found in the fact that collective 
bargaining results in higher average wages and better work- 
ing conditions than individual bargaining. Of course, ex- 
ceptions to this statement can readily be found; but it is 
true if many factories or mines are taken under consideration. 
For the manager of a corporation to refuse to bargain with 
representatives of organized labor is peculiarly illogical 
because the manager is himself the representative of the 
organized stockholders of the corporation. 

In several industries in this country, collective bargaining 
is the rule, — for example, coal mining, stove making, print- 
ing, railroading. The biggest labor market in the world 
is found in the American coal mining industry. Wages, 
hours of .labor, and other conditions in the industry are 
determined from time to time by collective bargaining be- 
tween representatives of the United Mine Workers and the 
coal mine operators. These representatives meet, bluff, 
higgle, and bargain. The alternative is a strike ; but strikes 
are rare in the mines in which the miners are organized. 
The system of collective bargaining is called the trade agree- 
ment system. Trade agreements can best be carried out 
when both sides are well organized and of almost equal 
strength. Wage bargains in the case of workers in the third 
and fourth groups are almost invariably individual; but 
little or no hardship is experienced by these well-trained 
professional workers and managers of industrial enterprises. 
I Arbitration. The differences between employers and their 
employees in regard to wages and other matters pertaining 
to the labor contract cannot always be settled by bargain- 
ing. In such an event the workers may quit work col- 
lectively; or the employer may close his establishment to 
his workers. The former is called a strike; the latter, a 



SHARES IN THE NATIONAL INCOME 57 

lockout. In the days of small-scale industry, a strike or a 
lockout affected outsiders very little; only those directly 
concerned were much inconvenienced. But to-day a 
strike in any large-scale industry is a matter in which the 
people of the nation or at least of the immediate locality 
are vitally concerned. A railway or coal mining strike will 
tie up the industries of the nation and soon starve or freeze 
many families who are not directly interested in railroading 
or coal mining. The great '' third party/' or the general 
public, often feels that employers and employees ought not 
to be allowed to fight out their differences to the detriment 
of the innocent bystanders. As a consequence, a demand 
has become articulate that some method, other than the 
crude one of the strike, be used to settle labor disputes in 
large-scale industries and particularly in industries such as 
railways and municipal utilities. 

Arbitration is an orderly scheme for fixing wages and de- 
termining other items in the wage contract. A board, 
usually composed of three persons, is selected to make a 
determination. This board may be composed of one person 
representing the employer, one representing the employees, 
and the third representing the public. The third person 
is supposed to be neutral; he is in reality as a rule the 
umpire or actual arbitrator. This board acts as a sort of 
court. Both sides present their case ; and the board after 
careful consideration renders a decision. If arbitration be 
compulsory as in certain Australasian states, both parties 
are obliged under penalty to accept the decision. In the 
United States, certain states, and the federal government 
in the case of interstate railways, make provision for volun- 
tary arbitration of labor disputes. The parties concerned 
may refer the difficulty to a board of arbitration. A recent 



58 ELEMENTARY ECONOMICS 

decision of the United States Supreme Court indicated that 
compulsory arbitration was legal and desirable in the case 
of interstate railways. 

The advantages of the arbitration process rriay easily be 
discerned. The strike with all its violence, suffering, and 
hatred is eliminated. But the difficulties attending this 
method of settling labor disputes are many. If the con- 
troversy is over the rate of wages, the court can find no scien- 
tific method of determining what is a fair day's wage. No 
student of economics or of labor problems has been able to 
bring forth a yardstick for the determination of the rate 
of wages which both sides to the controversy are willing to 
accept. The consequence of this unfortunate state of affairs 
is that a board of arbitration fixes wages by some rule-of- 
thumb plan, — what wages have been in that industry, what 
wages are elsewhere, or with reference to the cost of living. 
The findings of a board of arbitration are always in the 
nature of a makeshift or a compromise. The board patches 
up the difficulties, and the industry proceeds without the 
shock of a strike. But, unfortunately, the seeds of further 
difficulty are in evidence. When hours of labor instead of 
wages are to be determined by the board, the difficulty is 
not so considerable. It is possible to determine with some 
degree of accuracy what is a '' fair working day." However, 
when the issue is the recognition of the union or the matter 
of open or closed shop, the board has no adequate rule or 
scientific principle to guide it. 

Minimum Wage. Another method of modifying the con- 
ditions of the wage bargain is minimum wage legislation. 
A minimum wage law does not determine the wage rate ; 
it merely fixes a lower limit. Competition or monopoly, 
as the case may be, is only interfered with in so far as the 



SHARES IN THE NATIONAL INCOME 59 

employers are prevented from depressing the rate of wages 
below the legal minimum. This minimum is usually de- 
termined by ascertaining, as accurately as may be, the 
lowest possible cost of living of the workers under considera- 
tion. Such legislation has for its aim the protection of un- 
organized and unskilled workers who are forced by economic 
necessity to accept, unless protected by law, wages too low 
to enable them to maintain physical efficiency. In the 
United States, the state laws apply only to women and 
children.^ A minimum wage law may be compared with 
laws fixing minimum sanitary conditions or minimum con- 
ditions of safety. When organized labor fixes a minimum 
wage for the organized workers of a given occupation, the 
minimum is always fixed higher than a minimum fixed by 
legislation would be placed. Organized labor demands more 
than a bare subsistence wage. 

Interest. Interest is the price paid for the use of capital, 
or for the use of various instrumentalities which are the 
product of past effort, such as buildings, tools, machines, 
railways, ships, and docks. It is usually stated that interest 
is paid for the use of money or credit. In the great mass of 
borrowing, however, it is not money or credit which is wanted 
except as a means of obtaining equipment, buildings, or other 
forms of capital. Interest can be paid because a manu- 
facturing plant, for example, is able to increase its production 
by the use of more capital. An automobile manufacturing 
company borrows money. With this money or purchasing 
power, the company buys additional machinery. With the 
increased number of machines, the plant turns out more 
automobiles per week. If the manufacturer has made good 
business calculations, the additional output resulting from 

1 For a discussion of the legislation, see Chapter XVI. 



60 ELEMENTARY ECONOMICS 

the use of the additional machinery will pay for the wear 
and tear — depreciation — on the new machines and the 
interest on the amount of money borrowed ; and a surplus 
will be left for additional profits. Business men are willing to 
pay interest because they expect to be able to make profits 
because of the use of the capital purchased with the money 
borrowed. 

Interest is calculated at a certain percentage of the money 
borrowed — say, 6 per cent per annum. Actual or gross 
interest rates differ greatly. Money is often loaned on ex- 
cellent security for 3^ to 4 per cent. The Liberty Loan of 
the spring of 1917 bore 3^ per cent interest ; and the bonds 
were tax free. Some " gilt-edged " railway bonds bear 4 per 
cent interest. On the other hand, investments in which the 
uncertainty or risk is greater bear a higher rate of interest. 
In reality, high interest rates are part interest and in part 
return for risk taking. If an investment promises ten per 
cent interest, it is quite certain that a portion of the ten per 
cent should accurately be called a return for risk taking ; 
the investment is speculative or it is not " gilt-edged." 

Rent. Rent is the payment made for the use of land ; in 
popular language, the return from the use of a factory build- 
ing, office building, or residence is usually called rent. The 
latter return should, however, be designated as interest. 
Land furnishes space for all kinds of human activities, — 
for agriculture, for transportation over roads, railways, and 
waterways, for manufacture, for mining, for residences, for 
recreation in parks, playgrounds, and athletic fields, for 
school buildings, libraries, and museums. Land provides 
space for human activities and for the utilization of natural 
resources such as climatic advantages, water-power, and 
mineral wealth. Rent arises because, first, there is a scarcity 



SHARES IN THE NATIONAL INCOME 61 

of good — well-located — land ; and, secondly, because in 
the utilization of land the phenomenon of diminishing re- 
turns is observed. These two causes of rent should be care- 
fully studied. 

In a city, the land in the downtown section is the most 
exprensive ; the owner of such land receives high rents. On 
the contrary, land situated far from the centers of population, 
that is, far from markets, bears no rent or a very low rent. 
Many persons wish to use the first-mentioned kind of land ; 
but few desire to use the second. Competition among 
business men wishing to rent good city land, forces up the 
rental return. A business man is willing to pay more rent 
for a lot in the downtown district than for one of the same 
area and frontage located in the suburb. 

Let two stores of the same equipment, size of building, 
and efficiency of labor and management be compared. One 
located downtown will be more easy of access to the majority 
of would-be purchasers, its market opportunities are better, 
than another located in the outskirts of the city. At the 
end of a year's business, disregarding payment for the use 
of land, the downtown store will make more net profits than 
the other. The difference in the profits — $1000, for ex- 
ample — cannot be attributed to capital or labor or manage- 
ment, because these are by hypothesis equal in the two stores. 
The difference must be attributed to the greater desirability 
of the location of the downtown store. The additional 
rental return which the owner of that lot can obtain in com- 
parison with the one located far from the center of the city 
is $1000 ; and the selling value of the former is much greater 
than that of the suburban lot. The same reasoning applies 
to two farms of equal size and fertility and operated in 
the same manner and with equal efficiency. The one well 



62 ELEMENTARY ECONOMICS 

located will yield a higher return or rent than the other 
located where access to markets is difficult. Rent is a meas- 
ure of the desirability of land or of the superiority of one 
plot of ground over another in regard to location, climatic 
conditions, rainfall, configuration of the surface, mineral 
wealth, etc. 

Land which is poorly located or favored by few climatic 
advantages may yield no return over and above wages, 
interest, and ordinary profits. Such land is designated as 
no-rent land. The rent of all other kinds of land may be 
measured by the advantages possessed over no-rent land. 
The competition of business men for desirable plots of ground 
will finally cause land to be utilized for the purpose for which 
it is best suited. For example, land in the downtown district 
of a great city will not be used for farming or for market 
gardening; it will be used for store or office buildings. 
Land near a city may be used for market gardening but not 
for wheat raising. Land may be sold for a price because it 
enables the owner to receive a return in the form of rent. 
No-rent land is no-value land, — unless there is a fair pros- 
pect that it will become rent-bearing in the not distant future. 

Many writers insist that rent is paid for the fertility of 
the soil as well as for location. But, since the soil wears out 
or loses its fertility when cultivated, in a manner similar to 
a machine, and must be renewed by fertilization, it seems 
more logical to call soil capital and the return ascribable to it 
interest. Rent is that which is paid for location and standing 
room in the case of both agricultural and urban lands. Since 
water power and minerals are not renewable by human ac- 
tivity in the way in which capital is renewed or replaced, 
the return ascribable to the control or ownership of mineral 
wealth and water power is also placed in the category of rent. 



SHARES IN THE NATIONAL INCOME 63 

Diminishing Returns. It has been pointed out that labor 
and capital employed upon land and skillfully directed by 
an enterpriser will yield under normal conditions over and 
above depreciation and cost of raw materials, wages, interest, 
rent, and profits. But it is found in all lines of business ac- 
tivity that as more and more labor and capital are utilized 
without changes in the method of application, on a given area 
of land, — for example, one acre, — the total return increases, 
but after a certain amount or number of doses has been ap- 
plied the return per unit of labor and capital decreases, — 
diminishing returns appear. On the other hand, insufiicient 
applications of labor and capital to a given area of ground 
produce small returns per unit of labor and capital. The 
law of diminishing returns in farming may be illustrated 
by the following example. The application of one unit of 
labor and capital — so much labor, so many horses, farming 
implements, and buildings, a certain amount of fertilizer, 
etc. — will produce on a farm of 160 acres, 4 units of prod- 
ucts; the application of 2 units of labor and capital will 
produce 10 units of products ; 3 units, 12 ; 4 units, 14 ; 
5 units, 15. In this illustration, increasing returns arise 
up to the application of two units of labor and capital ; at 
that point diminishing returns appear. The land is not 
efficiently cultivated by the application of one unit; the 
farmer would do well to use his labor and capital on a smaller 
area of land. Two applications return the maximum yield 
per unit of labor and capital ; but after the application of 
two units " the harvest does not increase in proportion to 
the work applied." 

If land were free, if it could be obtained as it was by the 
early American settlers, the farmer would find it to his 
advantage to utilize his labor and capital in such a manner 



64 ELEMENTARY ECONOMICS 

as to use two units to every 160 acres. If land is valuable, 
if additional land must be rented and a rent paid, it may 
be profitable to use three or four or more units of labor and 
capital upon 160 acres rather than to rent more land, pay 
more rent, and spread the labor and capital over a larger 
area. Without going further into the theory of diminishing 
returns, it may be stated that the higher the rental return 
or the more valuable the land, the greater the amount of 
labor and capital which may profitably be used upon a given 
acreage of land, or the more intensive the cultivation of the 
land. 

The law of diminishing returns applies also to other forms 
of business activity, — manufacturing, mining, merchandis- 
ing, transportation, etc. ; but more labor and capital can, 
as a rule, be applied to a given area of land before diminish- 
ing returns appear, than in the case of agriculture. A 
manufacturing plant is spread out over several lots instead 
of being erected three or four stories in height on a smaller 
area. Railways use two, three, and four tracks^ and a wide 
right of way instead of one track and a narrow right of way. 
Diminishing returns fix a limit to the height of office buildings. 
But, let it be repeated, the more valuable the land the more 
intensive the utilization of labor and capital which can 
profitably be made upon the land. 

If it were not for the appearance of diminishing returns, 
all manufacture might be conducted on a small bit of ground 
and all necessary agricultural products might be produced 
upon a small area of land. Under such conditions, good 
land would never become scarce; and it may be assumed 
that rent would not appear, or at least would never be of 
much economic importance. Inventions, new methods of 
doing work, and more efficient management may enable 



SHARES IN THE NATIONAL INCOME 65 

enterprisers to utilize profitably more labor and capital than 
under former conditions; but sooner or later a point will 
be reached when further applications of labor and capital, 
using the same methods of application, will add smaller and 
smaller yields per unit. 

Rent and Land Value. Unlike interest, rent is rarely 
expressed by the percentage method. Rent is usually 
reckoned by the lump-sum method, so much per acre or per 
lot. The value of a piece of land is ultimately determined 
by its rent-bearing qualities, present and prospective. Lots 
in the downtown section of a growing city are salable at 
high prices because such lots, if built upon, bring to the owner 
a high rent and may confidently be expected to yield still 
higher rents as the city grows. Vacant lots are salable 
because of prospective rental returns. As a rule rents in- 
crease and the selling value of land rises as the population 
increases and as business opportunities become more and 
more desirable. In large cities, land is often sold for hun- 
dreds of doHars per foot front. Land, as a location upon 
which to carry on the work of the world, has apparently no 
upper limit as to selling value. The selling value of a build- 
ing, however, is always approximately equal to the expense 
of erecting a similar edifice. But land is not produced as is 
capital, and its amount is limited and fixed. The fortunate 
owner of a piece of land in a large city can receive a large 
return from it; he can in effect levy toll upon his less 
fortunate fellow citizens. About one twelfth of the na- 
tional income is taken by land owners in the form of 
rent. 

Profits. Profits " are the surplus over and above the 
expenses of production." The rate of profits depends upon 
the skill and enterprise of the business man managing the 



66 ELEMENTARY ECONOMICS 

industry or upon some superior advantages in the operation 
of the business. After the business man, the enterpriser, 
has paid all expenses, — for raw materials, fuel, insurance, 
taxes, rent, interest, wages, etc., — and allowed for deprecia- 
tion, the remainder or the surplus over and above expenses 
is designated profits. Rent, interest, and wages are rela- 
tively stable from year to year ; but profits are unstable and 
may experience extreme fiuctuations from year to year. A 
business may suffer a loss or receive no profits one year, and 
receive large profits the following twelve months. Profits, 
like rent and wages, vary from business to business and from 
enterpriser to enterpriser. One steel plant under excellent 
management may make large profits while a less able enter- 
priser in the steel industry may receive only nominal 
profits. Also, unlike other shares in the distribution of the 
national income, profits are by no means homogeneous. 
Profits may be roughly classified under one or more quite 
distinct heads : wages of management, returns due to 
extraordinary ability of the enterpriser, chance gains, and 
gains due to monopoly power. 

The amount which must be allowed the manager or enter- 
priser for his part in directing the business is the wages of 
management. The enterpriser must decide upon the par- 
ticular methods used in the operation of the business ; this 
may be differentiated from the work of the wage earner who 
follows directions. Many farmers are both laborers and 
enterprisers. They do some of the regular farm work and 
they are also responsible for the plans of operation which are 
followed. Unless the profits received equal or exceed the 
wages which the enterpriser could receive as a hired laborer 
in other plants, the enterpriser is likely to close up his business 
and become a wage worker. 



SHARES IN THE NATIONAL INCOME 67 

Enterprisers or managers possess very different grades of 
ability and initiative. Skillful managers who are able to fore- 
see changes in the business and who are able to coordinate 
efficiently the labor and capital under their direction make 
gains which do not accrue to the less capable and less ef- 
ficient managers. Profits of this sort may be designated as 
due to extraordinary ability. This type of profits, as well 
as the remaining two classes, is a surplus over and above 
wages of management. 

Chance gains are the consequences of certain unusual or 
fortuitous changes. Chance gains may often be balanced 
in the long run by chance losses. A sudden increase in 
the price of a given commodity may allow certain producers 
to make unusual profits. The recent rise in the price of 
cotton benefited many companies and individuals holding 
large stocks of cotton. 

The most persistent and the most important kind of profits 
is monopoly profits. In a succeeding section, the price- 
fixing plan of the monopolist will be discussed. If a mo- 
nopoly is successful, if it is worth while, the market price of 
the monopolized commodity will be so fixed that greater 
net returns will be received by the monopolist than would 
accrue under competitive conditions. This additional re- 
turn is a monopoly profit. In the case of a well-established 
monopoly, extraordinary returns will be received year after 
year by the fortunate owners of the monopoly. 

SUGGESTIONS AND TOPICS FOR DISCUSSION 

In this chapter, many difficult theoretical problems in regard to 
wages, interest, rent, and profits have been omitted or merely hinted 
at. Different theories are advanced by different writers on econom- 
ies. The attention of the student is particularly called to the fact 
that the majority of authorities, unlike the author, designate fer- 



68 ELEMENTARY ECONOMICS 

tility of the soil as a property of land rather than as a form of 
capital. 

1. What is the average wage of unskilled workers in your com- 
munity ? Of machinists ? Of teachers ? 

2. What is the usual rate of interest on notes secured by good 
first mortgages ? 

3. What is the interest rate on bonds issued by your city or 
town? 

4. Where is the most valuable land located in your city ? Why ? 
What is its selling value per foot front ? 

5. Do you know of any case of chance gains made in your com- 
munity? Of monopoly profits? 



CHAPTER VII 
WEALTH AND INCOME 

Distribution of Wealth in the United States. Wealth is 
desired by individuals because its ownership gives an in- 
come to the owner; it makes possible the satisfaction of 
wants and desires; it enables the owner to command the 
labor and the time of others. The money value of the 
wealth of the American nation — farms, factories, mines, 
buildings, railways, raw materials, finished products, etc. — 
was estimated in 1917 to equal approximately the enormous 
sum of $240,000,000,000. This amount is so large that we 
cannot adequately grasp its significance. Assuming that 
there are 22,000,000 families in the United States, the 
average money value of the wealth per family is about 
$11,000. The total given above includes all property 
owned by the national, state, and local governmental units. 
The amount actually owned by private families is, therefore, 
reduced somewhat below this figure. The distribution of 
this amassed wealth is very unequal. On the one hand, 
hundreds of thousands of families own only a very small 
amount of property ; but at the other end of the list is the 
billionaire. 

The following is a conservative estimate of the approxi- 
mate distribution of wealth in the United States : The 
wealthy class, including about two per cent of the people, 
own sixty per cent of the wealth of the nation ; the middle 
class, numbering about one third of the total population, 

69 



70 ELEMENTARY ECONOMICS 

own thirty-five per cent of the wealth ; and the great class 
of the poor, sixty-five per cent of the total population, own 
only five per cent of the nation's wealth. The average 
amount owned by a member of the great poor class was 
estimated to be $400 ; the great mass of wageworkers are 
practically disinherited. At the other extreme are the 
families possessed of great fortunes. If the largest be 
$1,000,000,000, it is equal to the estimated wealth of 
2,500,000 of the poor, — a larger number of persons than 
live in the third city of the United States, Philadelphia. 

Income. The income of the nation — of all families and 
the net income derived from governmental industries — is 
the sum total of all that the nation produces over and above 
an allowance for depreciation.^ This income may be calcu- 
lated, the student should remember, by subtracting from the 
gross product of the nation an allowance for depreciation, 
or wear and tear, upon buildings, machines, railways, and all 
other forms of capital used in the country. This income may 
roughly be divided into two classes : income from services 
and income from property, land, capital, and monopoly 
privileges. The money value of the annual national income, 
that is, the goods and services produced by all the work 
and activity of the people of the United States, was estimated 
in 1917 to be from thirty-five to forty billions of dollars. 
Of this vast sum, about two fifths was property income and 
approximately three fifths was service income. Two fifths 
of the national income goes to the owners of land, capital, 
and monopoly privileges in the form of rent, interest, and 
extraordinary profits; three fifths is received by workers 
of various kinds in the forms of wages, salaries, fees, 
ordinary profits, and the like. 

1 See Chapter V. 



WEALTH AND INCOME 71 

Some men and women receive large incomes without work- 
ing because they own land, capital, or some monopoly 
privilege; others work long and strenuously for a mere 
pittance. According to the income tax returns for 1914, 
there were forty-four families in the United States with an 
annual income of one million dollars or more. A few years 
ago, a banker of prominence estimated that the annual 
income of the wealthiest American was $65,000,000, — it 
was undoubtedly larger in 1919. Assuming that $730 was 
in 1914 the average annual income of a wage earner's family, 
the income of this one wealthy individual nearly equaled 
the income of 90,000 families of hard-working wage- 
workers. 

The contrasts between wealth and poverty are seen on 
every hand in all of our large cities. Great luxury on the 
one hand is found and on the other extreme poverty. Mil- 
lions of families in this great nation of ours have less than a 
sufficiency for physical health and social decency; while 
many are surfeited with luxury. Thousands of school chil- 
dren in democratic America are " noticeably underfed and 
ill-nourished." The problem of family finance is difficult 
of solution for the average American workingman. '' Mak- 
ing both ends meet '' is indeed a hard task for the wage- 
worker and his family. 

Careful investigations made before the opening of the 
Great War indicated that the income of many families of 
American wage earners was insufficient to maintain a 
standard of living sufficiently high to assure the physical 
efficiency of the family. A low income indicates poor food 
and insufficient nourishment, inadequate clothing, over- 
crowded, poorly ventilated, improperly heated and lighted 
homes. It also means little or undesirable recreation, few 



72 ELEMENTARY ECONOMICS 

magazines and books, and insufficient medical and dental 
care. Grinding and hopeless poverty — the poverty of the 
tenement and of the slums — is a menace to the welfare 
and stamina of the race. Since the war began, money wages 
have risen, but it is a matter of common knowledge that 
prices have also taken an upward course. 

Family Budgets. The United States Bureau of Labor 
in 1903 made a careful study of the income and expenditures 
of 11,156 "normal^' families of American wage earners. 
A normal family was defined as one having the husband at 
work, a wife, not more than five children, none being over 
fourteen years of age, no dependents, boarders, or servants. 
The total average yearly income of the 11,156 families 
studied was $650.98 ; and the average annual expenditures 
per family were $617.80. The expenditures were divided as 
follows : 

Per Cent 

Food 43.13 

Rent 18.12 

Clothing 12.95 

Fuel and Lighting 5.69 

Sundries 20.11 

Sundries, it will be noticed, evidently included expendi- 
tures for medicine and for the services of physicians and 
dentists, insurance, books, magazines and newspapers, and 
recreation. In families having five children the percentage 
of expenditures for food was 47.24 ; while in families having 
no children the percentage was 40.33. The total average 
income and the average expenditures of the families of 
American wage earners have doubtless increased since 1903, 
but the percentages have probably not been markedly 
modified. 



WEALTH AND INCOME 73 



TOPICS FOR DISCUSSION 

1. Make an estimate of the price of goods consumed personally 
by yourself during the past year. 

Food — include ice bill. 

Rent of home (If owned by family, take the interest on the value 
of the house and lot and household furniture, add repairs, insurance, 
and taxes). 

Clothing. 

Fuel and light. 

Recreation. 

Sundries. 

In the case of food, rent, fuel, and light divide the family expense 
by the number in the family. 

2. Find the average for the class. (The reports need not be 
signed.) 

3. How large a yearly income is required in your community 
adequately to maintain a "normal" family of a wage earner? 



CHAPTER VIII 
GROWTH AND DISTRIBUTION OF POPULATION 

The Increase in Population. The population of the world 
increased very rapidly during the nineteenth century ; it is 
estimated that the population in 1915 was nearly three times 
that of 1800. The number of persons living in the seven 
most important European countries, Russia, Germany, 
Austria-Hungary, France, Italy, Spain, and the United 
Kingdom, increased from approximately 156 millions in 
1800 to 344 millions in 1900. The increase in the population 
of these seven nations was greater during the last century 
than the total population at the end of the preceding hun- 
dred-years period. lii the United States, the rate of in- 
crease was much more considerable. The increase was 
from about 5,300,000 in 1800 to 76,000,000 in 1900 and 
92,000,000 in 1910. The rates of increase in the eight nations 
mentioned above were very dissimilar. The percentage of 
increase for the entire century was the least (45 per cent) in 
France and the most considerable (1326 per cent) in the 
United States. No reliable statistics are obtainable for the 
centuries preceding 1800 ; but it is generally conceded that 
the population of Europe remained about stationary in the 
Middle Ages and increased very slowly down to the opening 
of the nineteenth century. The nineteenth century was a 
period of remarkable increase in total population. In the 
growth of cities, of rapid evolution of scientific methods of 
production, and of growing security of political relations. 

74 



GROWTH AND DISTRIBUTION OF POPULATION 75 

The increase in population during the nineteenth century 
may be ascribed chiefly to two interrelated human achieve- 
ments : (1) the extraordinary increase in the per capita 
production of the means of subsistence ; and (2) the decrease 
in the death rate. The productive capacity of a twentieth- 
century man using machinery and aided by natural forces 
such as steam power and electricity is many times greater 
than that of the eighteenth-century man using hand tools. 
The productive capacity of the Western world increased 
faster than the population. The masses of the people at 
the end of the century were enabled to have more and better 
food, clothing, and shelter than at the opening of the period. 
The decline in the death rate was due to this fact coupled 
with advances in medical and sanitary science. The birth- 
rate of civilized countries declined during the century, es- 
pecially in the latter portion of the period. 

Growth of Cities. Even more remarkable than the in- 
crease in total population . has been the growth of cities. 
The city of to-day is the product of modern industrialism, 
engineering, and sanitary science. Ancient cities were 
comparatively few in numbers, small in population, and un- 
healthful. The death rate in medieval cities was also very 
high. Because of recent achievements in transportation, 
in scientific agriculture, in manufacture, and in mining, large 
aggregations of population are able to receive a regular and 
sufficient supply of food, fuel, and other necessities. Other 
technical achievements have added to the attractions which 
induce people to dwell together in large numbers. Before 
the nineteenth century the predominant type of civilization 
was rural ; to-day the typical citizen is an urban dweller. 

In 1800, there were in the United States only six cities 
with a population of 8000 or more ; a century later there were 



76 ELEMENTARY ECONOMICS 

556 such cities and, in 1910, 779. " In 1790, only 3.35 per 
cent of the people of the United States lived in cities. By 
1900 the majority of the population in fifteen states was 
urban and over two thirds of the population of eight states." 
In 1916, forty-one per cent of the population lived in cities 
of 8000 or more inhabitants ; and each of three cities boasted 
a population of over 1,000,000. The estimated population 
of Greater New York in 1916 was 5,600,000, — a greater 
number of persons than lived in the United States in 1800. 
The cities of Europe have also grown with extraordinary 
rapidity since 1800. London, Paris, Rome, Vienna, and 
Petrograd have rivaled New York, Philadelphia, and Boston 
in the rapidity of their increase in population. The popula- 
tion of Paris was 547,000 in 1800, and 2,714,000 in 1901 ; 
the figures for Berlin for the same years are 172,000 and 
1,888,000. 

Population and Resources. Many of the most vital 
questions affecting the welfare of the men and women of 
to-day center around the problem of population. The core 
of the problem of population may be reached directly by 
asking : What is the best relation between population and 
resources ? In primitive times clearly the population of a 
given area was of necessity limited to a comparatively small 
number; but modern methods of production require for 
efficient functioning a much larger population. But how 
large? Increase in numbers has made possible division of 
labor and increased production; it replaces isolation by 
established and varied social relationship ; cities, good 
transportation facilities, the daily paper, the art and leisure 
of to-day, and a multitude of other visible accompaniments 
of modern life, have come into being as the population has 
increased. But there is a limit to the desirable increase. 



GROWTH AND DISTRIBUTION OF POPULATION 77 

In some portions of the earth's surface where natural 
resources are provided in a niggardly manner and climatic 
conditions are unfavorable, even a scanty population cannot 
be maintained in comfort. Again, in extremely fertile 
regions the population may be so great and the productive 
methods so backward that the great mass of the inhabitants 
live in extreme poverty. China is an example of a nation 
having too great density of population. The most welcome 
condition is one in which the population is sufficiently large 
to allow the use of big-scale and scientific methods of pro- 
duction, transportation, and marketing; but not so great 
as to cause a reduction of the average income per person as 
the numbers increase. The desirable balance of population 
and of resources changes from time to time and from country 
to country. 

Evidently, if the population tends to increase faster than 
the improvements in the productive capacity of the nation, 
the average share of necessities and comforts will be reduced. 
The population will be on the road toward greater and 
greater misery, toward lower and lower standards of living. 
But, under such unfortunate circumstances, stronger in- 
dividuals and groups will try to maintain their accustomed 
standards of living at the expense of weaker individuals, 
groups, or classes. At the same time, the temptation will 
be strong to migrate to and to control the thinly occupied 
and not well-developed portions of the globe. A condition 
of this type produces antagonisms which are likely to be 
fatal to the development of democracy, and which offer many 
opportunities for international friction. 

The Immigrant in the United States. It was pointed out 
in an earlier chapter that the pressure of population upon 
the food supply was the cause of much primitive warfare. 



78 ELEMENTARY ECONOMICS 

In modern times, the pressure of population, the demand for 
markets and the desire for the control of natural resources 
are potent, underlying causes of struggle between nations. 
A militaristic people have always emphasized the importance 
of a large population. The autocrats of the world, the ad- 
vocates of the " mailed fist," have ever dilated upon the 
desirability of a high birth-rate without giving adequate 
weight to the probable effect upon the level of comfort. 
Food for the Dogs of War was the foremost consideration ; 
the mass of men and women were the weapons of the military 
leaders. 

But in a democracy in which the welfare of the masses, 
not the privileges of an autocratic group, is of first considera- 
tion, the argument in favor of a high birth-rate and a very 
dense population loses much of its attractiveness. The 
quality, rather than the quantity, of the population is placed 
in the foreground. The question of " who " is more im- 
portant than that of ^' how many." Quality counts. In a 
democracy, it is essential that the population shall not be so 
great that the common man can have only a small share in 
the benefits of technical advance and of civilization. A 
large number of poor, ignorant, improperly nourished, and 
incapable citizens are a menace to a democracy. A demo- 
cratic form of government can be highly successful only when 
its citizens are intelhgent and not too dissimilar in wealth 
and opportunity. 

A study of the composition of the people of a city, a state, 
or the nation involves political and social as well as economic 
considerations. America has often been called a melting 
pot. To our shores have come great mixtures of peoples, — 
English, Irish, German, Jew, Italian, Pole, Swede, Norwegian, 
Negro, Chinese, and many others. Are the elements too 



GROWTH AND DISTRIBUTION OF POPULATION 79 

diverse? Is Americanization going on effectively? Wave 
after wave of immigrants has come to our shores. These 
newcomers leave their homeland because of adverse eco- 
nomic or political conditions, hoping to find a land of promise 
in America, They are, as a rule, accustomed to a low 
standard of living and are willing to accept a low wage. 
In recent decades, the great mass of immigrants come from 
Southern and Southeastern Europe and enter into manu- 
facturing, mining, and construction work as wage earners. 
The recent immigrants are doing a large share of the rough, 
hard, distasteful kinds of work. They huddle together in 
certain districts of our cities and towns in which the housing 
and sanitary conditions are undesirable. And here they 
have been too often neglected or exploited by the remainder 
of the community. Since the opening of the war in 1914, 
the influx of immigrants has been very greatly reduced; 
and the war has emphasized the need of better treatment 
of the recent immigrants in order that they may become 
Americanized and unmistakably loyal to their adopted 
country. 

The Negro Problem. The Negro in the United States 
has given Americans a very difficult problem to solve. Like 
the immigrant, the Negro is a low-standard-of -living worker ; 
but the wide difference in race and color between the white 
and the colored people makes the Negro problem much more 
complex than that of the Americanization of the European 
immigrant. White workers dislike to work with the Negro, 
white householders dislike to have the blacks for neighbors, 
and the white traveler wishes the blacks to ride in a separate 
compartment. It is indeed difficult for a depressed race 
just emerging from slavery and still in the depths of poverty 
and as yet unblessed by many of the traits which make for 



80 ELEMENTARY ECONOMICS 

health, honesty, and regular industry, to receive fair treat- 
ment from a group of very different, more efficient, and more 
masterful men. But certain it is that the problem can only 
be solved through the exercise of forbearance and square 
dealing. Harshness and unfair treatment only aggravate 
the difficulty and delay the day of final solution. 

The Negro was brought to this country because short- 
sighted landowners saw an opportunity to make immediate 
gains through the use of a cheap and docile labor force. 
They ignored the difficult problems certain to result from the 
presence of a labor force of that type. Until the opening 
of the present century, the Negro problem was almost en- 
tirely a problem of the cotton belt of the South. But in re- 
cent years a considerable stream of Negro laborers has been 
flowing into the cities of the North. As a consequence our 
social problems in the North will be further complicated 
by the presence of the black race. 

TOPICS FOR DISCUSSION 

1. According to the Census Reports, what was the population 
of your State in 1860, 1870, 1880, 1890, 1900, and 1910? 

2. What was the population of your city or town in 1900 and 
1910? What is its estimated population to-day? 

3. How many different nationalities are found in your com- 
munity ? 

4. How many Negroes are living in your community? What 
kinds of work are the Negroes performing ? 

5. Are workers leaving your town or city for other communities ? 
Why? 



CHAPTER IX 
COMPETITION AND MONOPOLY 

Commodities are produced for the markets of the world 
under conditions of competition or of monopoly or more 
accurately of some combination of the two. In the business 
world there exists no case of perfect competition and few 
cases of complete monopoly; such conditions obtain 
chiefly in the mind of the economic theorist. Practically 
all marketable commodities are produced under conditions 
in which both competition and monopoly play some part. 
The term, *' competition," as used to-day means economic 
rivalry among producers, among purchasers, and between 
producers (sellers) and purchasers, tending to fix the market 
price of some economic good or service. In this sense of 
the word, competition did not bulk large in ancient or 
medieval times; custom and public authority were the 
potent instrumentalities in fixing wages and prices. And, 
indeed, competition is at the present time growing less and 
less influential as a price-fixing force ; monopoly and gov- 
ernmental authority are on every hand interfering with the 
free play of competition. But competition in the broader 
sense of personal rivalry is old and does not seem likely to 
vanish. Every producer (seller) of commodities is anxious 
to gain advantages for himself ; and each purchaser is like- 
wise desirous of getting the greatest possible return for his 
or her expenditures of purchasing power. Under com- 
petitive conditions each seller and each buyer is checked and 
restrained by the presence, actual or potential, in the market 
of other sellers and buyers. 

G 81 



J? 
82 ELEMENTARY ECONOMICS 

Regulated Competition. Competition in the business 
world is always regulated in some degree. Unrestrained 
competition of the '' tooth and claw " or the '' jungle " 
type, competition to the death without any restraining rules 
or regulations, no longer obtains. In fact, such competition 
has probably never existed in human society. It would be 
much like playing a game without rules. Competition takes 
place to-day under the restraint of law, private property, 
inheritance, family relations, custom, etc. Even war is 
subject to certain international regulations. Regulation of 
competition does not mean its elimination; regulation 
modifies the conditions or the level of competition. An 
illustration from another field may help the student to see 
the point clearly. Cultivation is the regulation of com- 
petition in the vegetable world by agriculturalists. The 
fierce competition of the hardy weed is in a measure removed ; 
but the competitive principle is retained on a different and 
higher level. The wild grape is a product of unregulated, 
" jungle," competition ; the Concord, of regulated com- 
petition. The rules of a game on the athletic field bar cer- 
tain forms of rivalry ; but competition and rivalry actively 
continue within certain well-defined limits. The foot- 
ball player may not slug his opponent or carry the ball after 
it is " down " ; but no one who witnesses a football game 
doubts that, within prescribed limits, active rivalry and 
competition are found on the football gridiron. " Fair " 
competition takes place under regulation, according to the 
accepted rules of the business game. Monopoly and special 
privileges tend to eliminate rivalry, or to give unfair ad- 
vantages to the favored few unless carefully regulated in the 
interests of the community. 

Under competition with several sellers and several buyers 



COMPETITION AND MONOPOLY 83 

the long-run or steady prices tend to equal the expense of 
producing the commodity. In the expense of production 
are included profits equivalent to wages of management. 
But the prices on the market often fluctuate greatly above 
or below the steady or normal price, — as, for example, the 
price of strawberries late Saturday night is often very low, 
much lower than the expense of producing the berries or 
the normal or long-run price. However, there are very 
few cases of free competition. The retail merchants in a 
given town, nominally competitors, make tacit or actual 
agreements as to prices. The milkmen of a city raise their 
prices is unison as if they belonged to one firm. Agreements 
and combinations are found in so many and so varied forms 
that free competition is practically an historic phenomenon. 
Almost everywhere along the line from the producer to the 
consumer, competition is checked and stifled.^ 

As competition means a minimum of profits, business men 
are constantly trying to escape the full pressure of com- 
petitive forces, by agreements, by combinations, and through 
monopoly. Monopoly power signifies the ability to restrict 
the output of the product monopolized and as a consequence 
the ability to regulate the price at which it is sold. As soon 
as competition is partially eliminated, business men endeavor 
to fix prices not at the expense of production but at prices 
"which the traffic willbear." The price of a commodity 
controlled by a strong and fairly permanent monopoly 
will be that which will give the highest net returns or the 
greatest monopoly profits. This monopoly price is not 
always a high price because raising the price as a rule reduces 
the number of articles sold. A large profit on each of a small 

1 Some critics will hold that this statement exaggerates the absence of 
competition. 



84 ELEMENTARY ECONOMICS 

number of articles may be less than a smaller profit on a 
much larger number of sales. In case the monopoly power 
is not considerable or stable, prices may be fixed somewhat 
below what will give the highest profit or what the traffic 
will bear. One or more of several reasons may determine 
the policy adopted. The business men joined together by 
agreements or combinations may fear that new competitors 
might come into the field if too large profits are received, 
and thus '' spoil " the market ; it may be possible to get 
satisfactory substitutes for the particular commodity; or 
government intervention may be feared. Consequently, a 
monopoly or a semi-monopoly may not exact all that is 
possible from the purchasers; but the ideal price from the 
seller's point of view is always " what the traffic will bear.'' 
A successful monopolistic business will bring more profits 
with the same outlay for wages, capital, and management 
than will a competitive business of the same type. This 
added return is called monopoly profit. It is paid for by 
the consumer (final purchaser) of the product ; monopolistic 
price is higher ordinarily than competitive price. 

The partial and, in some cases, the complete elimination 
of competition is not wholly an evil. Competition often 
leads to unnecessary and wasteful duplication of plants and 
of labor power. There are usually too many grocery stores 
in a small city for efficient service. Two or three milkmen 
delivering on the same street for different companies is an 
inefficient method compared with the method of delivering 
mail. Two gas plants in one town produce gas in a wasteful 
manner ; one plant would be much more economical. Com- 
petition has led in many instances to adulteration of products 
and the use of inferior articles in filling a contract. Com- 
petition means a dearth of profits ; and a business man is in 



COMPETITION AND MONOPOLY 85 

I business primarily for profits. On the other hand, while 
partial or fairly complete monopoly may possess certain 
advantages in economical operation over competition, unless 
effective regulation intervene these savings will go to the 
monopolist rather than to the consumer. Neither unregu- 
lated competition nor unrestricted monopoly can longer 
/ be tolerated by society. 

Classification of Monopolies. Monopolies are of many 
different types; several classifications of monopolies have 
been made by students of the monopoly problem. Monopo- 
lies are either public or private. A public monopoly is owned 
and operated by some governmental unit, — national, state, 
or local. The American post-ofhce system and a municipal 
water plant are examples of public monopolies. Such 
monopolies are operated primarily not for profits but for 
the benefit of the community. A private monopoly is 
operated and owned by an individual or by a private corpo- 
ration. In the case of the private monopoly, the profits go 
into the pockets of private individuals. 

Monopolies may also be conveniently classified as social 
or natural. Social monopolies rest upon some special 
privilege granted by the government or by some other 
monopoly. Patents and copyrights are familiar examples 
of a social monopoly resting upon a specific grant by the 
government. Certain businesses have been monopolized 
by governments. The tobacco monopoly of France and the 
old salt monopolies of European states are social monopolies. 
A few decades ago certain monopolies were established and 
maintained by rebates from railroads. A natural monopoly 
depends upon forces which develop independently of the 
will of human beings. The anthracite coal of Pennsylvania 
is produced under conditions of monopoly due chiefly to the 



86 ELEMENTARY ECONOMICS 



restricted area in which this important product is found. 
Railways and municipal utilities furnish examples of natural 
monopolies. The reasons why both railways and municipal 
utilities are naturally monopolistic businesses will be dis- 
cussed in a later chapter. 

Examples of Natural Monopolies. Anthracite or hard 
coal is a well-known fuel which is used for heating or cooking 
in from one-fourth to one-half of all the homes in the United 
States. Practically all of the anthracite coal deposits of 
the nation are found in Northeastern Pennsylvania. At 
the present rate of mining the supply of anthracite coal is 
sufficient to last for approximately a century or until 2020. 
The anthracite coal fields to which so many men, women, 
and children of America look for warmth in the cold weather 
of winter are owned and the coal is mined by a small group 
of allied companies. These companies have been able to 
fix the price of coal at such a figure as will give them large 
profits. If these allied companies fix a high price for the 
coal which you wish to put in your coal bin, no other com- 
panies can offer to sell the coal to you at a lower figure. 
No other important companies are mining anthracite coal. 
This enormously valuable mineral, a gift of nature as much 
as is air or sunlight, is owned and its price fixed by a few 
men, not by the majority of the men and women of America. 
And the monopoly profits go to a few fortunate individuals. 

The Standard Oil Companies and affiliated corporations 
bearing other names constitute a partial monopoly in the 
business of refining crude oil. There are some competitors, 
but the Standard Oil group of companies dominates the 
situation. It is a refiners' monopoly controlling a large 
percentage of the output of the refineries of the United States. 
Only a comparatively small number of oil wells are owned 



4 



COMPETITION AND MONOPOLY 87 

by the Standard Oil interests. The great organization has 
been built up through efficient management, rebates granted 
in the earlier part of its career by railways, and by means 
of the control of pipe lines through which the crude oil is 
pumped from the wells to the refineries. Crude oil can be 
pumped in pipe lines belonging to the Standard Oil companies 
from Oklahoma to the Atlantic seaboard. Enormous profits 
have been made by the Standard Oil interests ; dividends of 
40 per cent or more have not been uncommon. Mr. J. D. 
Rockefeller, the founder of the Standard Oil Company, is 
probably the richest man in the world. The control of an 
important natural product such as petroleum enables the 
owner of the monopolistic organization to reap large returns ; 
but the consumers must foot the bill. 

One of the best examples of monopoly through the control 
of patents is offered by the United Shoe Machinery Company. 
This corporation owns patents on various machines used in 
the manufacture of shoes. The company makes the ma- 
chines. Instead of selling them to shoe manufacturers, it 
is the practice of the company to lease the machines. The 
contract signed by the shoe manufacturer obliges him to use 
the machinery of the United Shoe Machinery Company ex- 
clusively. Like the Standard Oil Company, this corpora- 
tion has made large profits. 

TOPICS FOR DISCUSSION 

1. Are farmers competitors ? Storekeepers? 

2. Does your family purchase any articles produced under con- 
ditions of monopoly? 

3. If you were a monopolist, how would you determine the price 
of the monopolized article sold by you ? 

4. What is the attitude of men in your community toward 
monopolies ? 

5. Do they favor competition in all lines of business activity ? 



PART III 

ECONOMIC PROBLEMS 



CHAPTER X 
MONEY AND BANKING 

Money Is a Measure of Purchasing Power. Since at the 
present time, practically all workers work for wages, salaries, 
or fees, it is necessary for them to purchase the commodities 
which they and their families consume, with the wages they 
receive. This exchange is ordinarily consummated by means 
of money. The worker is paid in money and pays in money 
for the articles which he decides to purchase. Money is a 
tool which easily enables persons to exchange their services 
or their products for the services or the products of others ; 
it facilitates the exchange of commodities and services for 
other commodities and services. 

In reality, money is wanted only because it enables the 
possessor to get the goods and services which he wishes to 
consume. Money is a measure of purchasing power ; it is a 
representative of other goods. Obviously, money cannot 
be consumed ; a man with plenty of money isolated on a 
desert island would starve to death. We really do not want 
money; it is the commodities which money will enable us 
to purchase which we actually desire. 

Metallic Money. The early forms of money were com- 
modities which many members of the community desired. 
Sundry articles such as shells, cattle, furs, tobacco, and salt, 
have been used for money in times past. But in recent 
generations the metals have been selected as the money of 

91 



92 ELEMENTARY ECONOMICS 

the world; and gold is now the most important form of 
money. Gold is easily recognized ; it is durable and homo- 
geneous; gold can be divided into such forms as may be 
desired ; and it is fairly stable in value. 

Coinage. The minting of money from bullion is a public 
business. Our money is minted at the mints established by 
the federal government. The milled edges and the designs 
stamped on both faces of the coin are intended to prevent 
clipping and " sweating " of the coins by means of which a 
portion of the valuable coin is removed by dishonest persons. 
The government certifies to the weight and the fineness of 
the coins which it issues. 

In addition to gold coins, our government issues other 
forms of metallic money, — the silver dollar, half-dollar, 
quarters, dimes, five-cent pieces, and pennies. Gold is called 
standard money; the other forms of metallic money are 
called token money. Gold is admitted to free coinage, that 
is, gold bullion of the proper fineness may be exchanged at 
the mint for the same weight of coined gold. The gold in 
a gold coin, if the coin be melted, would still be worth 
practically the same as in the form of a coin. The bullion 
in the silver dollar and other smaller coins sells for less than 
the face value of the coin. Silver is not admitted to free 
coinage. The government mints enough of the token money 
to supply the needs for small business transactions. Token 
coins circulate at their face value even though the bullion 
in them is worth less, because token money is redeemable 
at any time in gold. The Treasury Department will give, 
for example, a twenty-dollar gold coin for twenty silver 
dollars, or eighty quarters. 

Paper Money. In the United States in addition to me- 
tallic money there are several kinds of paper money in cir- 



MONEY AND BANKING 93 

culation, — gold certificates, silver certificates, United States 
government notes (greenbacks), national bank notes, and 
federal reserve bank notes. The national bank and the 
federal reserve bank notes are issued by banks connected 
with the national banking system and will be described later. 
A gold certificate is circulated instead of a certain gold piece 
which is deposited in the Treasury of the United States. Its 
use saves the wear and tear upon the valuable gold coin. 
A silver certificate is a paper substitute for silver deposited 
in the Treasury. The United States government notes, 
familiarly called greenbacks, are merely promises to pay, 
not bearing interest, issued by the federal government. 
The number that may be issued is limited by law to ap- 
proximately $347,000,000. The greenbacks are, like token 
money, kept at par because the government will redeem 
them at any time in gold. The Treasury Department keeps 
a reserve in gold for this purpose. This reserve is ordinarily 
kept at about $150,000,000. 

Credit. Credit is the second great tool of exchange. 
This was not fashioned until long after money was first used. 
In fact, the extensive use of credit is of comparatively recent 
origin, and is a sign of a highly organized industrial system. 
When commodities or services are exchanged for money, 
the transaction is closed by the transfer of goods and money ; 
but when credit is used the time element enters. The person 
receiving the services or commodities promises to pay for 
them at some future date, usually in money. In the mean- 
time, in the typical case of borrowing, purchasing power is 
placed by the lender in the hands of the borrower. For 
example, Mr. A loans one hundred dollars to Mr. B for 
one year; B promises to return the one hundred dollars 
plus an additional amount called interest. 



94 ELEMENTARY ECONOMICS 

In reality, when money is said to be borrowed, the real 
borrowing is that of purchasing power. When A loans the 
one hundred dollars to B, the latter obtains the right to use 
purchasing power to the extent of the loan; and A gives 
up that right until some future date. Business men of all 
types borrow purchasing power. With it they are able to 
build factory buildings and machines, and obtain the raw 
materials and other supplies needed in carrying out their 
business plans; and the lenders lose temporarily the right 
to use this amount of purchasing power. 

Banks. The business of a bank is to deal in credit. It 
also acts as a safe place of deposit for surplus funds. Instead 
of each person putting his funds at night under the pillow, 
in the cash drawer, or in a private safe, the cash may be de- 
posited with the bank and the right to draw out the money 
as needed, acquired. A business man usually deposits each 
afternoon before the bank closes, the greater portion of his 
receipts for the day. The amount of this deposit will be 
added to his account with the bank, that is, to his deposit 
in the bank. He will pay his bills by drawing checks upon 
the bank. His check orders the bank to pay a certain sum 
to the order of his creditor. When these checks reach the 
bank, the amounts called for are paid and deducted from the 
business man's deposit. In this way checks take the place 
of money and economize the use of gold and silver. A draft 
is a bank's check. It is an order of one bank to another to 
pay a sum of money to a third party. The first bank has a 
deposit in the second bank corresponding to the deposit the 
business man has in the bank upon which he draws a 
check. 

The business man also utilizes the bank in another way. 
A manufacturer has just shipped his products to a distant 



MONEY AND BANKING 95 

purchaser. The selHng value is $10,000 ; and the purchaser 
will not pay for the goods shipped to him for, say, ninety 
days. But the manufacturer needs to pay certain bills 
now. He takes the bill of lading issued by the railway 
company to the bank and draws an order making the $10,000 
payable to the bank at the expiration of ninety days ; and 
the company to which the shipment was made, ''accepts" 
the order. The bank then adds to the manufacturer's 
deposit with the bank, $10,000 minus the interest or dis- 
count charged by the bank, — say, $150. The manufacturer 
can now pay his bills by checks drawn upon his account. 
The bank has manufactured credit to the amount of $9850. 
Other forms of security or of commercial paper, such as a note 
accompanied by adequate securities, are also accepted by 
banks for discount. The transaction just outlined is typical 
of the business of a bank. The bank makes its profits 
very largely by discounting commercial paper of various 
kinds. 

In order to make the business of banking clear to the 
student, it is convenient to consider the organization and 
business of a small bank. A bank requires capital or re- 
sources to start with just as does a steel plant or a furniture 
factory. A group of men take shares of stock in the bank 
which is incorporated. The shares are usually one hundred 
dollars each. If the number of shares be one thousand, the 
capital paid in by the stockholders and available for business 
would be $100,000. The liabilities of the bank would be 
$100,000 owed to the stockholders, and the resources $100,000 
in cash. After the manufacturer mentioned in the preced- 
ing paragraph comes to the bank with his commercial paper, 
the resources and liabilities would be scheduled in the follow- 
ing manner : — 



96 ELEMENTARY ECONOMICS 

Liabilities Resources 

Capital $100,000 Cash $100,000 

Profits 150 Loans 10,000 

Deposits .... 9,850 

$110,000 $110,000 

If the manufacturer wishes to receive a portion of the total, 
say $5000, in cash, the statement would be changed. It 
would then read as below. 

Liabilities Resources 

Capital $100,000 Cash $95,000 

Profits 150 Loans ..... 10,000 

Deposits .... 4,850 

$105,000 $105,000 

Profits are scheduled as liabilities because this sum is 
considered as owed by the bank to its stockholders. The 
bank owes the amount of its deposits to the depositors. 
Loans are resources because presently that sum will be paid 
to the bank. The cash on hand which a bank keeps is called 
the reserve. After a bank has been established and has done 
business for some time, the reserve is usually fifteen per cent 
to thirty per cent of its deposits. A bank " makes money " 
by loaning its capital and credit. If it keeps an unnecessarily 
large amount of cash on hand, a part of its capital is idle and 
is making no profits for the bank. Ordinarily a bank can 
safely loan out all of its funds except a comparatively small 
percentage of its deposits because, except in emergencies, on 
any one day only a small amount of cash is demanded by 
its customers. A " run on the bank " means that for some 
reason a large number of depositors suddenly demand cash. 
And, although the securities held by the bank may be good, 
unless the bank can get cash from some other bank, it may 
be forced to close its doors and go into the hands of a re- 
ceiver. 



MONEY AND BANKING 97 

The Clearing House. Since checks are used very largely 
by business and professional men to pay their bills, deposits 
made in bank A often contain checks drawn by individuals 
having deposits in other banks. Likewise, other banks will 
each day receive checks drawn upon bank A. In small 
towns a clerk may be sent from bank B to bank A with all 
the checks deposited that day in bank B drawn upon bank A. 
He will in turn receive all the checks deposited in bank A 
drawn upon bank B. If, for example, the total amount 
of the checks drawn on bank A in bank B is greater 
than the amount of the checks in bank A drawn on bank 
B, bank A will pay the difference in cash or its equiva- 
lent to bank B. In large cities, this daily settlement is 
made in a clearing house. At an appointed hour a repre- 
sentative of each important bank in the city goes to the 
clearing house with the checks which his bank has received 
drawn upon other banks. An exchange of checks takes 
place and the balances are settled at the clearing house under 
the supervision of the authorities of the clearing house. 

Banks in the United States. In the United States, the 
chief forms of banks are : federal reserve banks, national 
banks, state banks, savings banks, private banks, and trust 
companies. The first two are organized and operated under 
federal laws and are subject to federal control and inspection. 
The remainder are subject to more or less supervision by 
state authorities. The national banks and the federal re- 
serve banks may under definite regulations issue paper money. 
Other forms of banks in the United States do not issue paper 
money. The national banks and the state banks do the 
ordinary commercial business which has already been ex- 
plained. There are twelve federal reserve banks in as many 
districts into which the United States has been divided for 



98 ELEMENTARY ECONOMICS 

this purpose. Every national bank is obliged by law to 
own stock in the federal reserve bank of its district; and 
part of its reserves are placed in the reserve bank. Certain 
state banks may also become '' member banks " of the federal 
system. A federal reserve bank does not accept the de- 
posits of individuals nor loan to individuals. It is a bank's 
bank. The federal reserve bank may rediscount good com- 
mercial paper discounted by a member bank. If a member 
bank finds its reserves so low in respect to its loans that it 
is unwise to make further loans, the bank may send part 
of its securities to the reserve bank. The reserve bank will 
rediscount the securities and send the bank money for the 
securities. With the money thus obtained the bank in- 
creases its reserves and will then be able to accommodate 
more customers who wish loans. The federal reserve banks 
and the national banks are under the control of a Federal 
Reserve Board of five members appointed by the President. 
In addition to the five appointed members, the Secretary of 
the Treasury and the Comptroller of the Treasury are ex 
officio members. 

Savings banks do not carry on a commercial banking busi- 
ness ; but many commercial banks, state or national, have 
savings departments. Savings banks receive deposits of 
small savings, and reinvest them in long-time securities. 
Savings accounts are not as a rule subject to check. Only a 
small percentage of reserves is kept against the deposits of 
savings banks. A savings bank is not really a bank ; it is an 
institution for the profitable investment of the combined 
savings of many individuals. Trust companies were origi- 
nally organized to take charge of trust funds and to act 
as administrators of estates; but many perform also the 
functions of both savings and commercial banks. Private 



MONEY AND BANKING 99 

banks are unincorporated banks. Private banks are usually 
not as carefully regulated and controlled by state officials 
as are the state banks. 

Paper Money Issued by Banks. Before the Federal 
Reserve Act was passed in 1913, the only paper money issued 
by American banks was national bank notes. The federal 
reserve banks now issue federal reserve notes. A national 
bank could issue paper money only after depositing with the 
Comptroller of the Treasury at Washington, United States 
bonds equal to the amount issued. A bank, however, could 
not issue paper money to an amount exceeding its capital. 
The bank was also required to deposit with the Comptroller 
an additional amount in cash equal to ^ve per cent of the 
bank-note issue. Each dollar of paper money issued by the 
bank was therefore protected by an equal amount in govern- 
ment bonds, plus five cents in cash. In case a national bank 
failed, the holders of its paper money lost nothing. The 
Comptroller sold the bonds on deposit and redeemed the 
bank notes issued by that particular bank. 

National bank notes, as well as the forms of money issued 
directly by the United States government, were said to be 
inelastic. The amount issued and in circulation did not 
vary much from time to time during the year. However, 
at certain times in the year, in the autumn, for example, 
more money is needed in circulation than at other times. In 
1908, an act was passed for the purpose of giving some 
elasticity to the monetary system; but it accomplished 
very little. The Federal Reserve Act of 1913 had as one 
of its important objects that of giving the needed elasticity. 
This is accomplished by allowing the federal reserve banks 
to issue federal reserve notes upon the security, not of 
government bonds, but of the rediscounted commercial 



100 ELEMENTARY ECONOMICS 

paper which these banks have received from member banks. 
The payment made to member banks for the securities 
offered for rediscount may be made in the notes thus issued. 
For example, a national bank in Detroit sends $50,000 of 
acceptable short-time securities to the Federal Reserve 
Bank in Chicago to be rediscounted. The Federal Reserve 
Bank may now issue an additional amount of paper money, 
federal reserve notes, upon the rediscounted paper as se- 
curity. A reserve bank may also issue notes upon other 
assets or resources of the bank. A gold reserve must be 
maintained to provide for the redemption of the paper 
money issued by the bank; and provisions are made for 
retiring the notes from circulation when less money is 
needed. In this manner, our currency has been given a 
desirable degree of elasticity. It is expected that sooner 
or later the national banks will cease issuing paper money. 
The new bonds issued in 1917 and 1918 cannot be used as the 
basis of national bank-note issues. 

SUGGESTIONS TO TEACHER 

Obtain a blank check and several canceled checks. 
Also, a draft. 

Get a statement of resources and liabilities from a bank or out of 
a newspaper or financial journal. Discuss. 
Show different kinds of United States money. 



CHAPTER XI 
FORMS OF BUSINESS ORGANIZATION 

The Nature of Business. Business in its many forms is 
carried on primarily to make profits or, according to popular 
phraseology, to make money. The average business man 
works hard in order to make profits. He is interested in 
producing commodities for the consumer only in so far as by 
producing goods he can add to his profits. If, by producing 
or selling a smaller quantity of commodities, larger net 
profits can be made than by producing or selling greater 
quantities of commodities, the former method of pro- 
cedure will normally be followed. In short, the business 
man is particularly interested in buying and selling, in profits 
and prices, in contracts and credits; he is interested only 
as a means to an end, in the technical processes of manu- 
facturing or of mining, or in the plans for easing the burdens 
of the wageworker. The business man is not, however, 
superlatively selfish ; he is quite like other members of the 
community. But " business is business " ; it is not play 
nor philanthropy. The business man is busily engaged in 
getting a living and more for himself and his family. 

Consumers desire large quantities of commodities pro- 
duced and marketed ; they demand low prices, which often 
mean a dearth of profits. The divergent points of view of 
the producers and the consumers of a given product can 
easily be illustrated out of the experience of the student. 
For example, if you are engaged in the poultry business, you 
are pleased when the price of eggs rises and your profits 

101 



102 ELEMENTARY ECONOMICS 

increase. However, you wish the price of feed for the 
poultry to remain low. And as a small business man 
selling eggs, you would prefer to sell eggs at fifty cents a 
dozen when your hens were laying few eggs per week rather 
than at twenty cents a dozen even though your hens were 
laying twice as many eggs per week. But, on the other 
hand, if you must buy eggs from your neighbor or the grocery 
store, you are not displeased to learn that the number of 
eggs on the market has increased and as a consequence the 
price has been reduced. This simple illustration throws 
considerable light upon the processes of the business world 
and upon the aims of the business man and of the consumer. 

The Single Enterpriser. The business world is composed 
of various forms of business organizations or profit-seeking 
units. The chief forms are the single enterpriser, the partner- 
ship, the corporation, the cooperative establishment, and 
governmental enterprise. The simplest kind of business 
organization is the single-enterpriser form. One individual 
is responsible for the business. He is the sole owner ; and he 
usually manages the business himself. The single enter- 
priser may or may not hire others to work for him. Nearly 
all American farms are single-enterpriser establishments; 
and many small retail stores and small shops are also of this 
type. The owner is directly responsible for the debts of the 
business; his liabiHty is said to be unlimited. All the 
property he possesses may be seized in case of business 
failure. Only small kinds of businesses, not requiring large 
amounts of capital, are suitable for this form of business 
organization. 

The Partnership. Two or more individuals may associate 
together to form a partnership. The members of the partner- 
ship or firm are each personally responsible for the debts 



FORMS OF BUSINESS ORGANIZATION 103 

of the firm. Each partner is usually placed in charge of 
the part of the business for which he is specially qualified. 
More capital can be obtained than by the single-enterpriser 
form. The partnership is found in many mercantile and 
professional businesses. Up to the time of the Civil War, 
the single-enterpriser and the partnership were the most 
important forms of business organization. In recent years, 
the growing size of the business unit has caused the corporate 
form to become predominant in the American business 
world. 

The Corporation. Because of its great importance, careful 
consideration must be given to the corporate form of business 
organization. About four-fifths of the value of all our manu- 
factured products are produced by corporations. All of 
our railways and nearly all of American banks, insurance 
companies, and important mining companies, are operated 
by corporations. Big business is to-day managed by corpora- 
tions. 

The corporation is created by governmental action. A 
corporation is organized by granting a charter to a group of 
persons. In the United States, charters are granted by the 
state governments ; and the laws of the various states differ 
considerably in regard to incorporation. Legally considered, 
a corporation is an artificial person; it may make con- 
tracts, sue, and be sued as may a natural person. The 
persons, similar to partners in a partnership, connected 
with a corporation are called stockholders. When the 
corporation is organized and its charter granted, it issues 
shares of stock. These shares are usually of the par or 
nominal value of one hundred dollars each. If the capitaliza- 
tion is placed at $100,000, 1000 shares would be issued. 
A stockholder may own one or many of these shares. The 



104 ELEMENTARY ECONOMICS 

original stockholders do not always pay full or par value 
for their stocks. In that case the stock is said to be 
" watered." If the 1000 shares of the corporation mentioned 
above were sold to the stockholders at $50 each, the actual 
capital of the corporation would be $50,000 instead of 
$100,000, — the par value of all the stock. The stock 
would, under these conditions, be fifty per cent " water." 
The stockholders elect certain of their number to be directors 
of the corporation. In voting for directors, each stockholder 
is allowed as many votes as he owns shares. The directors 
select the president and other important administrative 
officers. In case the corporation fails, a stockholder is 
financially liable only for the amount paid in to obtain his 
shares. His other property cannot be taken to pay the 
debts of the corporation. In this respect the corporation 
differs from the partnership. 

Bonds. Very often corporations obtain part of their 
capital by issuing bonds. A bond is a mortgage on the 
property or the income of the company. In this country, 
it is almost invariably a mortgage on the property. A 
bondholder, unlike a stockholder, does not have a voice in 
choosing directors or in determining the policy of the corpo- 
ration. A bond, however, draws a definite rate of interest. 
This interest must be paid before any profits may be paid 
to the stockholders, that is, before dividends may be de- 
clared and paid. If the interest is not paid, the bond- 
holders may ask a court of proper jurisdiction to declare 
the company insolvent, and to place the business in the hands 
of a receiver. The receiver will either close up the affairs 
of the corporation and pay as far as possible the creditors 
including the bondholders, or he may operate the business 
until it is on a firmer financial basis. In the latter case. 



FORMS OF BUSINESS ORGANIZATION 105 

sooner or later the stockholders will again obtain control of 
the business. 

In the case of a corporation manufacturing automobiles, 
from the total or gross amount received for the automobiles 
sold in aj^ given year must be deducted the expenses of 
operating the plant, — wages, raw material, fuel, and the 
like. Interest on the bonds, taxes, and insurance must also 
be paid. After the current expenses are paid, an amount 
must be set aside for repairs and depreciation due to wear 
and tear upon the equipment of the plant. After all these 
deductions have been made from the gross income, the re- 
mainder, if such there be, belongs to the stockholders. It 
may all be divided among them in dividends in proportion 
to the number of shares owned by each stockholder ; or, as 
is usually the case with corporations whose financial standing 
is good, part may be held by the company as a surplus, and 
dividends declared out of the remainder only. The surplus 
may be used to enlarge the plant or for investment in other 
businesses. 

The income from investments in bonds is small but com- 
paratively certain. The income derived from the owner- 
ship of corporation stocks is much more uncertain. It may 
be considerable ; but, if no profits are made, dividends can- 
not be declared. The interest rate is always specified in 
the bond ; but there is no definite dividend rate. However, 
certain stocks called preferred stock bear a definite dividend 
rate, provided sufiicient profits are made. The remaining 
surplus, if any, may be paid to the holders of common stock. 

Since a very large portion of the business of the nation is 
performed by corporations, it may be inferred that the 
corporate form of business organization is superior in certain 
important respects to the single-enterpriser form or the 



106 ELEMENTARY ECONOMICS 

partnership. The corporation continues although its original 
stockholders die or sell their shares to others. Under similar 
conditions a reorganization of a partnership would be 
necessary. The corporation can easily get large amounts 
of capital from many sources. The liability of a stockholder 
is limited to the amount paid into the treasury of the com- 
pany. Lastly, it is comparatively easy to change the officers 
and managers of a corporation. 

One of the chief disadvantages of the corporate form of 
business management grows out of the fact that very few 
of the many stockholders of a large corporation take an 
active interest in the affairs of their company. They are 
satisfied if dividends are regularly paid. Many stock- 
holders of western railways, for example, have never seen 
the road of which they are part owners. Much of corpora- 
tion ownership is absentee ownership. Again, many corpora- 
tions secured their capital very largely by the sale of bonds. 
The stock represents little or no money actually paid in. 
The stock is '' watered." The company hopes, because of 
some unusual opportunity, to make large profits and to be 
able to pay dividends upon stock which represents no ac- 
tual investment. The bondholders who have furnished the 
capital have no voice in the management of the business. 
The organizers or promoters of the corporation who have 
paid nothing for their stock control the business and may 
reap unusually large returns. On the other hand, if the 
project proves to be a failure, they have lost little or nothing. 
Other abuses or disadvantages of the corporation exist. 

The Trust. Large corporations or combinations of cor- 
porations, having some measure of monopoly, are called, in 
popular language, trusts. The word, " trust," used in this 
manner cannot be accurately defined. The Standard Oil 



FORMS OF BUSINESS ORGANIZATION 107 

Compan}^ and the United States Steel Corporation are often 
called trusts. The latter company owns the stock of many 
subsidiary companies; it is a combination or a group of 
corporations. Trusts or large combinations arise in order 
to secure the advantages of large-scale business and to stifle 
competition, thus enabling the trust in some degree to limit 
output and control prices. In so far as combination means 
efficient production and the elimination of waste, it is de- 
sirable ; but in so far as it leads to monopolistic control, 
higher prices, and extraordinary profits, competition is unde- 
sirable from the point of view of the consumer. 

The American people are quite definitely committed to the 
policy of regulating trusts. The federal government and 
nearly all of the forty-eight states have passed anti-trust 
legislation. The earlier acts aimed to smash trusts and to 
force a return to the earlier form of small-scale business. 
These laws have not fulfilled their mission. Recent legis- 
lation recognizes the unmistakable trend toward large- 
scale or " trustified " business, and attempts to prevent '' un- 
fair " methods of crippling small competitors. The Federal 
Trade Commission, established in 1914, has the power to 
investigate the affairs of large industries doing an interstate 
business, and to require reports from such corporations. 
The Commission also has been given the authority to issue 
orders restraining a corporation from using '' unfair methods 
of competition in commerce.'' In a considerable degree, 
the Commission has the power to determine what are and 
what are not '' unfair " competitive methods. 

Cooperation. ' This form of business organization is a 
marked departure from the three forms which have been 
considered. In a manufacturing plant operated under the 
cooperative plan, the workers in the industry would control 



108 ELEMENTARY ECONOMICS 

the plant and choose the managers. Each worker would 
have one and only one vote. The capital necessary would 
be furnished by the workers or borrowed from outside parties. 
The profits or " savings " are divided among the workers 
or cooperators. This form of cooperation has had very 
little success up to date. The cooperative store has attained 
greater success. The purchasers join together and control 
the store. Each purchaser or cooperator has only one vote. 
Herein, the cooperative establishment differs radically from 
the corporation. The cooperative establishment is a demo- 
cratic form of business organization.^ 

Governmental Enterprise. Various gpvernmental units 
in this and other countries manage certain business enter- 
prises. Ordinarily such enterprises are not carried on for 
profits. The aim is to keep rates low, pay fair wages, and 
provide good service. In this country, a large percentage 
of the city water plants are owned and operated by the 
municipalities. Many gas and electric lighting plants are 
also under municipal management.^ The federal government 
operates the mint and the post-office. Over one half of the 
steam-railway mileage of Europe, Asia, Africa, and Australia 
is owned by governmental units; but on the American 
continent private ownership of railways is almost universal. 

^ Cooperation is discussed at greater length in the chapter on Methods 
of Paying for Labor. 

2 See also the chapter on Municipal Monopolies. 



CHAPTER XII 
RAILWAY TRANSPORTATION 

The Importance of the Railway. Regular, rapid, and safe 
means of transportation is essential to modern complex 
civilization. Interstate and international trade, minute 
division of labor, world markets, and great corporations are 
dependent upon excellent means of communication and 
transportation. Railways are, indeed, the arteries of the 
bushiess world. Stop the movement of the freight trains, 
and business activities stop also. Thanks to the railway 
and the steamship, different parts of the nation and of the 
world can exchange products, and men are no longer restricted 
in their consumption to the products of the locality in which 
they live. The manufacturing city gets its food supply 
with the aid of the railway and steamship from distant 
Dakota, California, or Cuba; its iron ore from the Lake 
Superior district and its cotton from the South. 

The political significance of transportation as well as its 
industrial or economic importance cannot easily be over- 
emphasized. The modern nation is literally tied together 
by the heavy steel rails of the railway and the wires of the 
telegraph and the telephone. The steamship, the submarine, 
and the airship are eliminating the isolation caused by the 
ocean. The World War has conclusively proved to the 
American people that we can no longer live in political and 
economic isolation from the rest of the world. 

The railway industry is one of the largest in the United 
States. Nearly two million workers are employed by our 

109 



110 ELEMENTARY ECONOMICS 

railways. It is probable that twenty billion dollars are in- 
vested in the American network of railways, — approxi- 
mately equal to the amount invested in manufacture. Over 
one third of the railway mileage of the world has been built 
in the United States. Because of its magnitude, and its 
economic and political importance, the railway problem is 
one worthy of careful investigation. 

Growth of the American Railway. The pioneer American 
railway using the steam locomotive was the Baltimore and 
Ohio. Construction work began in 1828; and thirteen 
miles were completed in 1830. The mileage of the American 
railways has increased rap dly. In 1860, the total mileage 
had risen to over 30,000 ; in 1880, to over 93,000 ; in 1890, 
to over 163,000; in 1910, to 240,000; and in 1914, to 
252,231. The first railways were short; and, as different 
widths of track were used by different roads it was impossible 
to transfer cars from one road to another. A standard gauge 
was soon adopted; and the consolidation of companies 
followed. In 1915, five large groups controlled over one 
half of the railway mileage of the United States The largest 
of these groups, '' the Union Pacific Southern Pacific 
interests," controlled 34,500 miles, — a total greater than 
the mileage of all American railways when Abraham Lincoln 
was inaugurated President of the United States. Under the 
pressure of the exigencies of the war in 1917, the railways 
were operated practically as a unit. This step may point 
the way toward permanent unification of the railway business 
under one control, private or public. 

The Railway Is a Monopolistic Business. The railway, 
the telegraph, public utilities, such as water, gas, and electric 
lighting plants and street railways, and possibly the telephone 
system, have certain common characteristics. These busi- 



RAILWAY TRANSPORTATION 111 

nesses may be classified as monopolies of organization. 
With the possible exception of the telephone, the expenses 
of operation per unit of service tend to decrease as the amount 
of business performed increases. In each, the amount of 
fixed expense is considerable. A railway must have its rails, 
roadbed, depots, and signaling devices whether few or many 
trains are operated each day. It also costs very little more 
to run a train of well-laden cars than it does to run a shorter 
train containing many empty cars. Certain expenses are 
almost independent of the number of trains operated per day 
or of the number of cars per train. It has been established 
by competent authority that two thirds of the total ex- 
penditures of a railway are for fixed expenses, and only one 
third for expenses which vary with the traffic. 

The manager of a business of decreasing costs and large 
fixed expenses is peculiarly tempted to get more business. 
If one railway parallels another, each manager will strive 
to get all the traffic he can. Unless regulated by the govern- 
ment, rate cutting will follow. It is to the advantage of the 
railway to get more traffic even though additional business 
pays little more than the added cost of carrying it. A simple 
example from a transportation business having a smaller 
percentage of fixed expenses than the railway, will illustrate 
the problem of the traffic manager. Suppose that two men 
A and B are each transporting butter and eggs by motor- 
truck from a rural district to the neighboring city. Neither 
one is able to obtain a full load each day. A finds that 
farmer X who patronizes B is sending an amount each day 
which, if added to A's load would give the latter all he could 
readily carry. A secretly cuts the rate or gives a rebate to 
X, and gets the traffic. It costs A but little more to carry 
the additional load, as his truck is making the trip daily. 



112 ELEMENTARY ECONOMICS 

B loses the traffic and finds his load still further reduced. 
He, in turn, secretly cuts rates and thus obtains some of 
A's customers. Presently a fierce rate war is on. Butter 
and eggs are carried at very low rates. Both truck-men lose. 
Presently, they make an agreement in regard to the division 
of the traffic and rates are raised. Or, perhaps, one sells out 
to the other. This course of events has been followed in the 
railway business. Competition of parallel lines is wasteful 
and futile. Unrestricted and unregulated competition soon 
leads to agreements and to combinations, — in short, to 
monopoly. 

The railway having large fixed expense and being a business 
of decreasing expense of operation, is, therefore, an industry 
in which the manager is subjected to temptations which do 
not greatly affect the manager of a grocery store. Extra 
business implies larger profits; and the manager is often 
tempted to give special favors to get shipments over his line. 
On the other hand, the law now requires the railway to treat 
all shippers alike. The special favors or discriminations 
which railway managers are tempted to offer are personal, 
place, and commodity. The illustration just considered was 
one of personal discrimination. Sometimes large shippers 
have forced discriminations in their favor by threatening 
to send all of their shipments over another route. The 
traffic manager was driven to discriminate in their favor or 
lose the traffic. 

Place discrimination consists in giving more favorable rates 
to a town, a city, or a district than is given to other towns, 
cities, or districts. If two sections of the country are pro- 
ducing the same products for the market, rates slightly dis- 
criminating in favor of one section will make it easy for that 
section to undersell its competitors. The favored district 



RAILWAY TRANSPORTATION 113 

will be prosperous; the others will feel the pinch of hard 
times. Unregulated railways have the power to build up or 
to destroy a city by fixing freight rates. 

The other side of the problem must not, however, be over- 
looked. If a town or a district has the option of sending its 
products by water as well as by rail, the railway must lower 
its rates to and from that district or lose much of the traffic. 
And, because of the high percentage of fixed expenses, it is 
more profitable to get the traffic from the seaport town at 
low rates paying more than the variable expenses, than it is 
to lose the traffic. It may even be to the advantage of the 
inland towns discriminated against. But, of course, not 
all place discriminations are justifiable. The Interstate 
Commerce Commission has held that some place discrimina- 
tions are justifiable. 

Discriminations in regard to commodities are encouraged 
under governmental regulations. All railways have intricate 
classifications of freight. Goods which are valuable are 
classified higher and pay higher rates per mile than cheap 
and bulky products. Such articles as grain, coal, iron ore, 
and gravel are charged low rates, and do not pay their 
share of the fixed expenses. If, however, high rates were 
charged for coal, the amount carried would be greatly re- 
duced, and manufacturing plants using coal in the production 
of articles which will bear higher rates would be adversely 
affected. 

The motive which primarily impelled traffic managers to 
classify freight can be simply illustrated by again consider- 
ing the case of a motor-truck carrying butter and eggs. If 
ordinarily the entire capacity of the truck was not utilized, 
the driver would find it advantageous to fill the space with 
some other product, even though the latter must be carried 



114 ELEMENTARY ECONOMICS 

at a low rate. A low rate per pound might be given to 
potatoes. If the same rate were charged as for butter, it 
would not be profitable for the farmer to send potatoes by 
this particular motor-truck. But, since the truck is making 
the trip, some extra profits can be obtained by filling up the 
extra space with potatoes paying a rate but little more than 
the extra expense of carrying this cheaper and bulkier prod- 
uct. The railway traffic manager finds himself in a similar 
position. Classification is not legally considered to con- 
stitute discrimination. 

Regulation or Public Ownership. Railways are monop- 
olies of organization, and should be recognized as such. 
Since the railway is a business of increasing returns or dimin- 
ishing expenses, the temptation to allow personal and place 
discrimination is strong. And this signifies that govern- 
mental regulations must be utilized to fix rates and to de- 
termine many of the conditions of operation; or, as an al- 
ternative, the government must take over the railway in- 
dustry and operate it as a governmental enterprise. Com- 
petition cannot be relied upon ; the choice of necessity lies 
between governmental regulation or governmental owner- 
ship. The United States tested for thirty years, from 1887 
to 1917, the policy of regulating railways. 

The Regulation of Railways. Under the federal con- 
stitution the regulation of interstate commerce is vested 
in the federal government; but the control of the intra- 
state traffic is a function of the state government. With 
the growth of big business and of wide market areas, inter- 
state commerce has grown to huge proportions. The more 
important form of regulation is that placed in the hands of the 
federal government. The federal government and forty- 
six of the forty-eight states have laws providing for the 



RAILWAY TRANSPORTATION 115 

regulation of railways by means of some form of commission. 
The state commissions vary greatly in the extent of their 
powers and in efficiency. The federal act providing for the 
Interstate Commerce Commission was passed in 1887; it has 
been amended and strengthened several times. The two 
fundamental principles upon which both the state and 
federal legislation rest are : (1) railway rates must be reason- 
able and (2) discriminations must cease. 

In 1917, the Interstate Commerce Commission consisted 
of seven members appointed by the President and confirmed 
by the Senate. Under its jurisdiction were placed the inter- 
state traffic of steam and electric railways, telegraph, tele- 
phone, and cable lines, pipe lines, express and sleeping car 
companies. The statutes provide that all railway rates 
must be reasonable; but no definite standard is offered for 
measuring fairness or reasonableness. The Commission is 
now engaged in the formidable undertaking of making a 
valuation of the physical property of the railways. The 
theory underlying this effort is that rates should be such as 
to give a fair return upon the tangible property of the com- 
panies. Many grave and intricate problems, which cannot 
be here discussed, however, arise in connection with this 
hypothesis. 

Discriminations between persons or places are prohibited ; 
and the giving or receiving of rebates is likewise placed under 
the ban. It is unlawful to charge more for a short than for 
a long haul over the same line and in the same direction, — 
unless permission is granted by the Commission. Pooling 
or the division between two or more railways, by agreement, 
of the freight traffic or of the sums received from the shipper, 
is prohibited. Uniform bookkeeping is required and reports 
must be made annually to the Commission. Rates to be 



116 ELEMENTARY ECONOMICS 

charged must be filed with the Commission and, as a matter 
of actual practice, rates cannot be raised without the con- 
sent of the Commission. The Commission has the power 
to fix maximum rates for a period of two years. All orders 
of the Commission are subject to court review and may be 
set aside by order of the court. 

The Adamson Act, passed in 1916, fixed the length of the 
standard working day on interstate railways at eight hours. 
In effect, the law also established a rate of wage payment. 
The Supreme Court of the United States upheld the con- 
stitutionality of the Adamson law. The court also sug- 
gested in its decision that compulsory arbitration was a legal 
method of settling labor disputes in the railway industry. 
The contrast between the rights of a railway corporation 
and those allowed to the owner of a small manufacturing or 
mercantile business, is striking. Railway rates are prac- 
tically fixed by a commission; hours of labor, the use of 
safety appliances, and even wage rates are subject to out- 
side regulation ; and the government apparently may settle 
by arbitration all disputes between the railway as an em- 
ployer of labor and its employees. Surely, the old, much- 
lauded right to run one's business without interference is 
out of date in the semi-public railway industry even in times 
of peace. 

An additional reason for asserting the right of the govern- 
ment to regulate railways is found in the grant to the rail- 
ways of the right of eminent domain. By the use of this 
legal weapon, the railway can, if necessary, condemn property 
for its right of way. Without this right, railways would find 
it difficult, if not impossible, to obtain the land necessary 
to lay their tracks. Some one property owner might block 
the project by refusing to sell his property. From 1850 to 



RAILWAY TRANSPORTATION 117 

1870 the federal government also aided railways by giving 
them as land grants, millions of acres of land. 

Regulation by commissions has been given a thirty-years 
trial in this country. It must be conceded by the unpreju- 
diced observer that the experiment has not been an un- 
mitigated success. From time to time, weaknesses have 
been found, and new legislation passed to remedy the evils. 
The power of the Interstate Commerce Commission has 
been steadily growing; and it is to-day a dignified body of 
experts. Nevertheless, the railways in recent years were 
finding it more and more difficult to borrow capital for needed 
additions to the equipment of the roads. In the fall of 1916 
and the spring of 1917, the railways were clearly unable to 
handle the traffic with a reasonable degree of efficiency. 
The next step may be permanent governmental ownership and 
operation of railways. Such a step would be in the direction 
already taken by many European countries. 

In 1917, the railways of the United States were operated 
under the control of the " Railroads' War Board." This 
Board was organized by the railways '' to operate all the 
roads of the country as one system for the purposes of na- 
tional defense." It was the aim of the Board to secure the 
maximum of efficiency in the movement of coal, food, ma- 
terials, and troops. In December, 1917, the United States 
government as a war measure took control of the great 
American railway network. Such control was originally 
authorized to continue for twenty-one months after the 
treaty of peace was signed. The American railways are 
at the present time (1919) owned by private corporations 
and are operated by the federal government. 

Under unified and governmental administration certain 
improvements have been made which enable more work to 



118 ELEMENTARY ECONOMICS 

be accomplished with less effort, — the true aim of any busi- 
ness organization from the social point of view. Unneces- 
sary freight and passenger offices have been closed, indirect 
routing of freight cars has been in a large measure eliminated, 
expenditures for advertising and legal services have been 
reduced, and the salary roll for high officials cut. Under 
one management, locomotives and rolling stock can be 
standardized with a saving in original cost and in the ex- 
pense of repairs. Improvements of various kinds can be 
made on the theory of the betterment of the entire national 
system instead of a single line. Under unified control, the 
total resources and equipment of the railways can be easily 
and quickly mobilized to complete efficiently and expe- 
ditiously a specific task; and the special interests of a par- 
ticular railway will no longer work against the general 
railway interest or the general interest of the nation. How- 
ever, practically all of these benefits are possible under 
unified private management as well as under governmental 
control. 

If united operation be desirable as a war measure, if it 
makes for efficiency under the stress of war, surely unifica- 
tion will also make for eflniciency and for the reduction of 
waste in the more prosaic times of peace. It is quite clear 
that, if the operation of the railways is again to be placed 
in the hands of the owners, the federal statutes should be so 
changed as to allow the unification of the American rail- 
way system under the strict supervision of the Interstate 
Commerce Commission. 



CHAPTER XIII 
MUNICIPAL MONOPOLIES 

General Principles. Municipal monopolies are natural 
monopolies controlling the output of a product or service 
of great importance to the municipality. The businesses of 
supplying water, gas, electricity, and street railway service 
to the people of the cities are the most important municipal 
monopolies. These are frequently called public service 
corporations because the business of such monopolies is of 
especial interest to the people; the public welfare is de- 
pendent upon the proper and continuous functioning of 
municipal monopolies. 

A private municipal monopoly of the type under con- 
sideration, before it can do business, must obtain a franchise 
giving to the corporation the right to use the city streets for 
the location of its tracks, poles, pipes, or wires. In the early 
history of municipal monopolies, these franchises were 
usually donated to the company proposing to operate; 
they were often perpetual and did not bind the company 
in any effective way to give good service at reasonable rates. 
Fifty or seventy-five years ago our cities were much smaller 
than to-day, and the business of public service corporations 
was new and unstandardized. The investment of capital 
in a street railway plant was considered to be and in reality 
was a speculative venture. To grant franchises without 
recompense and without definite provisions for regulating 
the company was not considered unwise ; and naturally such 

119 



120 ELEMENTARY ECONOMICS 

a course of action was favored by the promoters of public 
service corporations. The unprecedented growth of cities 
in. recent decades has made the franchises granted very 
valuable monopoly privileges. Under public management, 
the advantages of this special privilege would go to the com- 
munity in the form of profits or of reduced rates. 

The early history of municipal monopolies is that of small 
corporations aided by public grants and without regulation. 
The consensus of opinion was that competition would be a 
sufficient guarantee of fair prices and equitable treatment. 
But the business of these companies grew larger as our cities 
increased in population and wealth. Franchises became 
very valuable and public service corporations entered politics 
in order to obtain special favors and to prevent movements 
in favor of regulation from coming to a successful issue. An 
era of unparalleled municipal corruption followed. Ameri- 
can city government was held to be a disgrace to our civiliza- 
tion. " The Shame of the Cities " was held up before the 
American people. Finally public sentiment was aroused. 
The people of our cities are coming to accept the conclusion 
that the business of supplying transportation, water, gas, 
electric light, and telephone service are public service in- 
dustries ; that they are essentially monopolistic ; and that 
franchises should not be granted in perpetuity or without 
definite provisions for regulation and control by the city 
or the state government. And along with this new con- 
ception of the public service corporation is coming a new era 
in municipal government. In the last decade or two, 
municipal administration has made unprecedentedly rapid 
strides toward efficiency and away from political jobbery. 

The reasoning used to prove that a gas company or a 
street railway company is engaged in a monopolistic business, 



MUNICIPAL MONOPOLIES 121 

is quite similar to that used in the case of a steam railway. 
It is economical to grant a franchise to only one gas company 
in a city. It is clearly wasteful and uneconomical to allow 
two lines of gas mains to be laid in the same street, or to build 
two gas plants where one larger plant would produce the 
gas demanded at less cost. A gas company must have a 
plant and gas mains whether it has 10,000 or 15,000 cus- 
tomers. Ordinarily, the cost per 1000 cubic feet of gas is 
less when the number of consumers is 15,000 than in case 
the number is reduced by the competition of another com- 
pany. As in the case of the railway, competition soon brings 
about combination with two plants doing what one could 
perform less wastefully. Competition between street rail- 
way companies in a given city soon leads to combination. 
In 1890, one of the large cities of the Middle West boasted 
no less than seven street railway companies. To-day with 
a population approximately three times as numerous, only 
one company is doing the business. 

Water. A plant furnishing pure water under pressure to 
the people of a town or city has become a necessity in this 
country. No city in the United States is without such a 
plant ; and many small villages have built a water-pumping 
plant. Comfort, health, cleanliness, protection from fire, 
civic beauty, and recreation, all require an adequate and 
certain supply of flowing water. The business of furnishing 
a water supply is so vital to the welfare of the community, 
and the engineering problems are so well standardized that 
a large percentage of American waterworks are operated 
directly by the cities. In 1912, only eight cities with a 
population of 100,000 or over were supplied with water 
pumped by privately owned plants. The consumer ordina- 
rily pays an amount equal to the cost of the water supplied. 



122 ELEMENTARY ECONOMICS 

Municipal ownership and operation of waterworks in this 
country is a success. 

If the municipaUty furnishes cold water for a variety of 
purposes, may it not also with propriety be expected to 
furnish at cost hot water for heating our houses? Central 
heating plants are much more economical and cleanly than 
a multitude of private homes each operating a wasteful 
and dirty heating plant. The use of water power trans- 
ported through the medium of electricity for heating and 
lighting may also become quite general in the not distant 
future. Consequently, the water power of the nation should 
be utilized directly by governmental units or by private 
companies strictly regulated by public authority. 

Gas, Electricity, and Transportation. Gas has been used 
as an illuminant for over one hundred years. With a few 
exceptions, American municipalities rely upon private com- 
panies to furnish gas for lighting, heating, and cooking. In 
1912, Richmond, Virginia, was the only city of at least 
100,000 population in which gas was furnished by a mu- 
nicipal plant. As many of the conapanies were organized and 
obtained their franchises before the recent movement for 
the regulation of municipal monopolies, over-capitalization, 
poor service, and exorbitant rates have too often been char- 
acteristic of this municipal monopoly. In recent years, 
however, the situation has improved. 

Electricity first came into use for lighting purposes in the 
eighties. For illuminating purposes, it is gradually displacing 
gas. The use of electricity for heating and for cooking may 
be expected to increase greatly in the near future. Municipal 
ownership of electric lighting plants is much more common 
than of gas plants ; but the large electric plants are nearly 
all operated by private companies. Large companies have 



MUNICIPAL MONOPOLIES 123 

been organized to supply several towns and cities. For ex- 
ample, the little city in which the writer lives is supplied 
with electricity by a corporation which also furnishes elec- 
tricity to several other cities in Southern Michigan. The 
current is carried at high tension from a source of power many 
miles away. 

Electricity has practically displaced other forms of power 
for street railways; but in recent years the electric street 
car is facing the competition of the automobile. With the 
exception of three cities which own and operate street rail- 
ways, the American systems are operated by private com- 
panies. The tendency, as in other municipal monopolies, 
is toward more strict regulation of the transportation com- 
panies. In the past, street railway companies have been 
guilty of over-capitalization and corrupt methods. The 
telephone business is in the hands of private corporations. 
In European cities, municipal ownership and operation of 
municipal monopolies is much more common than in the 
United States. 

Other Municipal Industries. American cities have not 
gone far in developing public operation of industry. The 
business of cleaning the streets and, in many cases, that of 
paving the streets is carried on directly by American munic- 
ipalities. There are about twenty municipal asphalt paving 
plants. A large percentage of our cities have publicly owned 
markets from which truck farmers and others may sell direct 
to consumers. New York City and Boston own and operate 
ferries. The city of New Orleans owns a large percentage 
of its water-front. 

Several American cities have established municipal uni- 
versities. One city owns a telephone plant ; and Cincinnati 
owns a steam railway over thirty miles in length. Several 



124 ELEMENTARY ECONOMICS 






American cities operate ice plants. New York City has 
six large markets for selling produce from the farms, and 
meat. Some of the Australian states have entered into a 
variety of businesses in competition with private firms. 
West Australia has for years owned and operated brickyards, 
quarries, saw-mills, steamships,.hotels, agricultural implement 
factories, and a laundry. In 1916, under the pressure of 
rising prices, retail butcher shops, fish markets, and bakeries, 
owned and operated by the state, were opened in certain 
large cities. Queensland also began in 1915 the operation 
of retail butcher shops.^ 

In the United States, a further increase in municipal 
ownership and operation of municipal monopolies may be 
anticipated. The advocates of municipal ownership urge 
that the rates charged for the service may be reduced and 
the quality of the service improved. Service rather than 
profits may be the aim of pubHc operation. The profits of 
monopoly, it is asserted, will go to the public instead of into 
the pockets of the owners of a monopoly privilege. Public 
service corporations would no longer exist to corrupt city 
officials. It is also urged that better wages will be paid 
under municipal than under private management and that 
working conditions will be improved. 

On the other hand, the opponents of municipal ownership 
and operation urge that the efficiency of the plants will be 
reduced under public management, and that certain in- 
centives which keep the managers of private enterprises alert 
and progressive are lacking under municipal control. It is 
also asserted that the employees in municipal plants will use 
their political influence to obtain higher wages, a shorter 
working day, and other concessions. 

1 Notz, The Survey, September 22, 1917. 



MUNICIPAL MONOPOLIES 125 



TOPICS FOR DISCUSSION 

1. What municipal monopolies are carried on in your town or 
city? 

2. Should other businesses be carried on as municipal monop- 
olies? Why? 

3. Should water be furnished free to residents of your city? 

4. Should a municipal monopoly "make money"? 



CHAPTER XIV 
THE LABOR FORCE 

Labor in Modem Industry. In colonial days, the pro- 
ducer consumed the major portion of the supplies he pro- 
duced. Industry was organized on a very simple scale; 
the tool was the predominant type of instrument used. 
Only a comparatively small percentage of the labor force 
worked for wages — were wage earners. The pioneer farmer 
was self-employed ; he was not a wage earner. Two other 
forms of labor were utilized in colonial times, indentured 
servants and slaves. Hard labor, the sweat of the brow, 
played a large part in early American industry. Capital 
was of much less relative importance than at the present 
time. Industry was still in the small-tool stage of evolution. 

Since the Civil War, American industry has become 
capitalistic. The machine has largely displaced the tool. 
The self-employed worker has almost entirely disappeared 
except in farming and in certain forms of professional serv- 
ice. Capital is dominant; the owners of capital hire 
wageworkers and direct their efforts. The wageworker 
obeys orders; he no longer owns the tools or the machine 
with which he works, the raw material, or the finished product. 
He labors for a definite contractual wage. Goods are almost 
universally produced for the market, not for home con- 
sumption. The attention is centered upon prices. 

The wage-earning labor force is now a very considerable 
percentage of the total population. In the United States, 
there are at the present time 30,000,000 or more gainfully 

126 



I 



THE LABOR FORCE 127 

employed workers. Of this number approximately one 
fourth are female, — and the number of women workers is 
rapidly increasing. A very large percentage of our wage 
earners live in cities and are foreign-born or the children 
of foreign-born parents. The rough, hard, routine manual 
labor is the burden of the recent and often despised im- 
migrant. The unskilled workers in our factories, a large 
percentage of the mine workers, the section hands on our 
railways, and the workers in the beet and onion fields are 
recent immigrants. A large fraction of the farm laborers 
and also of the drifting and irregular workers of the West 
are, however, not composed of recent immigrants. Big 
national problems are connected with the Americanization 
of this great recent immigration and with raising its stand- 
ard of efficiency. The managerial positions, professional 
service, clerical work — the salaried positions — and the 
skilled trades are very largely in the hands of the children 
of the earlier immigrants from Northwestern Europe. 

Immigration. Until 1880, nearly all of the immigration 
to this country came from Northwestern Europe. The 
English-speaking people were predominant in the first 
decades of the new nation. In the forties, the Irish driven 
by the potato famine came in large numbers to our shores. 
The revolutionary disturbances of 1848 also led many Ger- 
mans to cross the Atlantic. In the decade, 1851-1860, 
Great Britain, Ireland, and Germany furnished nearly 
nine-tenths of the total immigration. A rural environment 
and cheap land attracted the attention of many sturdy and 
independent men. The immigrant of the pre-Civil War 
period had to undertake a long and tedious journey and 
after his arrival enter upon the hardships and the isolation 
of pioneer life. Only the sturdy and independent dared 



128 ELEMENTARY ECONOMICS 

undertake the long and difficult journey unless the con- 
ditions in the home land were very repulsive. 

About 1880, the situation changed. The frontier and the 
free homestead were becoming matters only of history. 
Manufacture, mining, and the railways were growing. Big 
business was appearing above the horizon of the industrial 
world. The ever-growing factories utilizing more and more 
machinery were searching for docile routine workers; and 
improved transportation facilities made the journey to 
America comparatively safe and easy. In 1909, Great 
Britain, Ireland, and Germany sent only about one-eighth 
of our total immigration; but Austria-Hungary, Italy, 
Russia, and Poland contributed five-eighths of the total. 
While the character of the stream of immigration was chang- 
ing, its volume was increasing in an irregular and jerky 
fashion. Years of prosperity turned more and more faces 
to the New World; an epoch of hard times reduced the 
volume. Immigration is a matter of pushes and pulls. 
Good times and liberal treatment attract many newcomers 
to a country of immigration; but hard times and harsh 
treatment in the home lands also send many forth in search 
of better things. In 1837, only 80,000 immigrants were 
admitted; in 1907, the high- water mark of 1,285,000 was 
attained, — a total greater than the population of Cleve- 
land in 1917. This total was equal to one third of the 
population of the United States when the first Census was 
taken in 1790. For 1909, the figures are 751,000 ; but, in 
1914, the stream came near to the mark of 1907 with a total 
of 1,218,000.1 The opening of the Great War immediately 
checked immigration. In 1915, the number reported was 
326,700; in 1916, 298,826; and, in 1917, 295,403. Every 

1 The figures are for the fiscal year ending June 30. 



THE LABOR FORCE 129 

year a considerable number of aliens return to their home 
country. On the average, the number returning has been 
equal to one-third of the incoming horde. The net immi- 
gration has been, therefore, about two-thirds of the gross 
figures given above. In 1919, the percentage returning is 
much larger. 

The great expansion of industry in recent years and the 
rising tide of immigration are related phenomena. Without 
the labor supply furnished from outside the country, in- 
dustrial progress would have been slower and the growth 
of cities less rapid. On the other hand, except for the great 
progress toward large-scale business and the increasing use 
of machinery, the immigrant from Southern Europe would 
have found no job awaiting him as soon as he planted his 
feet on the land of promise. The marked reduction in the 
number of immigrants following the opening of the war in 
1914 tended to reduce the supply of wageworkers. As a 
consequence in 1916, Negroes began to come North in con- 
siderable numbers. The Negroes obtained jobs in mills 
and factories. By the middle of the year 1917, several 
hundred thousands of colored folks had left the South. 

The immigration of recent decades from Southern Europe 
has forced upon the people of the United States certain 
very difficult economic and social problems. A large per- 
centage of the newcomers are ignorant and unskilled; they 
are not accustomed to the form of government with which 
we are familiar. They have taken low-paid jobs and have 
been obliged to live in the crowded and insanitary portions 
of our cities and factory towns. The death rate among 
the recent immigrants and their children is high. The 
American people have paid little attention to the immigrant. 
We have expected him to work hard for low wages, and to be 



130 ELEMENTARY ECONOMICS 

docile and uncomplaining. It has been complaisantly urged 
that America is a " melting pot " for the people of the 
Western World ; but the pot has not been carefully watched. 
When face to face with a great world war, Americans began 
quickly to realize that national security demanded that 
more attention be paid to the immigrant, that he and other 
unskilled workers be accorded better treatment than that 
which has been too frequently given, and that the Ameri- 
canization of the immigrant is of paramount importance. 

Restriction of Immigration. Although Americans have 
repeatedly boasted that the United States is an asylum for 
the oppressed and forlorn of all lands, opposition to immi- 
gration is not of recent origin. Many of the founders of 
the nation were opposed to immigration. They feared that 
the newly established republican form of government might 
be undermined and destroyed, provided too many came here 
from monarchical Europe. In the forties and fifties of last 
century, the coming of the Irish Catholics and of many 
Germans who did not seek to be naturalized, led to the 
formation of a political party which proposed to exclude 
Catholics and immigrants from political offices. But, 
after the Civil War opened, the opposition to immigration 
died away temporarily. 

The first general immigration law was passed in 1882. 
Since that date several acts in regard to immigration have 
been placed upon our statute books. Briefly stated, our 
present laws exclude illiterates, paupers, defectives, diseased 
persons, immoral persons, anarchists, polygamists, and 
laborers under contract to work for some American em- 
ployer. Chinese laborers are excluded by special act ; and 
through an agreement with the Japanese government 
laborers from that country are not allowed to come to the 



THE LABOR FORCE 131 

United States. Careful inspection of immigrants is pro- 
vided for at the ports of entry by the federal government. 
The opinion is held by many Americans that this or any 
other prosperous and progressive country having a low 
birth rate may properly protect itself from the influx of 
low-standard-of-living workers from a country of high 
birth rate and dense population. It is urged that unre- 
stricted migration would in such a case tend to spread 
poverty world wide. 

Routine Work. Modern industry imposes upon the 
workers speed and monotony. Skilled occupations have 
been pulled apart and subdivided into a considerable num- 
ber of unskilled or semi-skilled forms of labor. The worker 
is speeded up and repeats in a monotonous way some simple 
operation, hour after hour and day after day. Simple 
routine work continued for a long working day finally be- 
comes deadening and stupefying. The worker becomes an 
unthinking machine; and after his day's work is done he 
is in no position to consider the obligations of good citizen- 
ship. A long working day coupled with monotonous un- 
skilled work complicates greatly our labor and social prob- 
lems. The eight-hour day makes for good citizenship. 

The Migratory Worker. A dangerously large percentage 
of the American labor force is composed of migratory and 
homeless workers. The conditions in many of our im- 
portant industries make for irregularity of work and for 
the degeneracy of the workers. The section gangs on our 
railways and construction workers of various kinds include 
many homeless, drifting workers. In the harvest fields and 
on the fruit farms of the West, in the beet and onion fields, 
and in the logging camps are found migratory and homeless 
workers. It was estimated in 1915 that in California alone 



132 ELEMENTARY ECONOMICS 

there were nearly 200,000 casual workers. This Pacific 
Coast state offers jobs to thousands in the summer who 
must drift back to the cities and to idleness and debauchery 
in the winter. These casual workers are almost without 
exception harshly treated by their employers and by the 
public authorities. The radical and revolutionary labor 
organization called the Industrial Workers of the World is 
composed almost entirely of workers from the casual labor 
group. One of the keenest observers of labor conditions 
in this country warns the American people that '' we shall 
hear more and more of the unskilled, underpaid, disorganized 
seasonal workers. They will themselves see to it that we 
hear." The irregular workers, discontented and ill-treated, 
are a menace to organized society; but stern repression of 
this discontented group will not solve the problem. This 
great group of drifting workers has lost the normal incen- 
tives in life and the point of view which places emphasis 
upon workmanlike qualities. These unblessed rootless 
workers are hostile to organized society and to the ideals 
which the middle class and the more conservative group of 
American workingmen blessed with home ties and a stake 
in life, hold dear. 



CHAPTER XV 
LABOR ORGANIZATIONS 

Why Is Labor Organized? The modem labor organiza- 
tion is a product of the cleavage between employee and 
employer. As long as industry was small-scale, as long as 
the employer usually worked with his men, and every wage- 
worker hoped to become a small business man, to work for 
himself, the only labor organizations were local and ephem- 
eral labor societies formed to prevent a threatened encroach- 
ment upon their standard of living or to combat some other 
danger. In recent decades, industries have become large- 
scale; the employer no longer comes into personal contact 
with his employees, and the wageworker no longer hopes 
to rise out of his group into the class of independent business 
men. Workingmen, as a consequence, have become pri- 
marily interested in their prospects as wageworkers, and 
are no longer much concerned about the chances of be- 
coming other than wageworkers. The labor organizations 
of to-day are permanent and firmly united bodies. 

A labor organization has been defined as an '' association 
of wage earners for the purpose of maintaining or improving 
the conditions of their employment." To maintain or to 
improve working conditions organization is essential, de- 
clares the unionist of to-day. Through union action, it is 
asserted, wages have been raised, the length of the working 
day shortened, and other advantages gained. The union is a 
better bargainer than the individual wage earner. The 

133 



134 ELEMENTARY ECONOMICS 

unorganized wageworker cannot hope to drive an equitable 
bargain with a large aggregation of capital. In short, in 
unity there is strength. Capital has found the union 
called the corporation advantageous; labor likewise is 
banding together for its betterment. The labor organi- 
zation is the counterpart of the corporation. 
' Relation of Employer to Employee. The point of view 
of the employer is quite different from that of the employee. 
The employer is primarily interested in the financial success 
of his business and only secondarily in the welfare and 
happiness of the workers whom he hires. To many em- 
ployers of to-day, productive activity — work — on the 
part of the great mass of people is the only excuse for the 
existence of the latter. Too often are the wageworkers 
of the nation treated as animated machines. 

On the other hand, the workers in this era of machinery 
and of great productivity are insistently demanding more 
and more of the comforts of life and an increasing amount 
of leisure time. Labor organizations have come into being 
to aid in giving the workers higher wages, a shorter working 
day, and better working and living conditions. The labor 
organization is insisting upon "respect for mere men,'* 
and upon better treatment for the great class of toilers in 
mill, mine, store, and elsewhere. 

Not only are the economic interests of the employer and 
the employed very different, but their work and experience 
are dissimilar. One is engaged in directing a business, in 
buying and selling, in markets and prices, in contracts 
and property rights ; the other in doing a routine or a skilled 
form of manual work involving little or no business experi- 
ence. The two rarely or never meet outside the factory in 
social life. As a consequence of this lack of contact with 



LABOR ORGANIZATIONS 135 

each other during working or leisure hours, each is inchned 
to under-emphasize the abihty, the importance of the 
function, and the virtues of the other. Out of this un- 
fortunate situation easily develop misunderstanding, an- 
tagonism, and bitterness in the industrial world. 

The Knights of Labor. A few isolated labor organizations 
may be found in the United States before 1825; and from 
1825 to the close of the Civil War many organizations of 
workingmen were formed. Some of these were of con- 
siderable political and industrial importance. But the 
first great American organization of laboring people was 
named the Knights of Labor. It was organized in 1869 as 
a secret society. The Knights of Labor was not a trade 
union; it was a mass organization of all kinds of workers. 
The Printers' or the Typographical Union, for example, is a 
trade union; but the Knights of Labor admitted printers, 
carpenters, tailors, unskilled workers, — all sorts of wage- 
workers. The organization grew slowly until the early 
eighties ; then it suddenly increased greatly in membership. 
In 1886, it is said to have had 600,000 members. But it 
was very difficult to hold this big mixed group of workers 
together. The period of decline soon followed; and in its 
stead appeared the American Federation of Labor. The 
Knights of Labor is still in existence as a very weak and 
inconsequential organization. 

The American Federation of Labor. The American 
Federation of Labor was organized in 1881. The under- 
lying principles of this labor organization are quite different 
from those of the Knights of Labor. The Federation is,, 
as its name indicates, a federation of unions. An individual 
wageworker does not directly belong to the American 
Federation of Labor. If he is a union carpenter, he belongs 



136 ELEMENTARY ECONOMICS I 

to a local union of carpenters in his town which in turn is a 
part of the national union called the United Brotherhood of 
Carpenters and Joiners of America. This national union is 
affiliated with approximately 110 other national unions such 
as the United Mine Workers and the International Associa- 
tion of Machinists, in the American Federation of Labor. 
City federations, state federations of labor, and trade de- 
partments such as the Mining Department, are also organized 
within the American Federation; but the one hundred and 
eleven (in 1918) national unions control the policy of the 
American Federation of Labor. 

Over three millions of wage workers belong (1919) to 
the organizations affiliated with the American Federation. 
An annual convention is held each year to which dele- 
gates are sent from the affiliated organizations in propor- 
tion to membership. The Federation unites the major 
portion of union men in the United States into one body. 
It has little direct authority over its affiliated members; 
but its indirect influence is of considerable importance. 
It exerts much political influence in securing the passage 
of legislation favorable to the wageworkers of the 
nation. According to the constitution of the Federation, 
its chief purposes are to unite the national unions together 
for mutual assistance, to encourage the sale of union 
label goods, to secure labor legislation, to influence 
public opinion in favor of organized labor, to aid and en- 
courage the labor press, and to aid in forming local unions. 
Samuel Gompers is the President of the Federation. Only 
a few important labor organizations, including the radical 
Industrial Workers of the World, now remain outside the 
Federation. The total membership in all unions in the 
United States is nearly four million. 



LABOR ORGANIZATIONS 137 

The Structure of a Labor Organization. There are two 
important varieties of labor organizations at the present 
time, trade or craft and industrial unions. A trade union 
is composed of wageworkers of one trade only, such as, for 
example, the machinists. The union machinists in a given 
town working in different shops, all belong to one local, a 
part of the International Association of Machinists. The 
industrial union is not limited by occupational lines ; it aims 
to unite all the wageworkers in a shop or mine, irrespective 
of the sort of a job they may hold, into one coherent organiza- 
tion. The United Mine Workers of America is an industrial 
union; into this union are gathered all the workers in and 
around the mines, — miners, helpers, engineers, carpenters, 
teamsters, etc. The United Mine Workers is the largest 
union affiliated in the American Federation of Labor; but 
the great majority of the national unions in the American 
Federation are trade unions. Modern industry is tending 
to destroy the sharpness of trade demarcations ; more and 
more unions of the industrial type may be anticipated in 
the future. 

The fundamental unit in labor organizations is the local. 
In a trade union, as has been indicated, a local is composed 
of the workers in a given trade, living in one locality ; these 
locals in turn belong to a national, sometimes called an 
international, union. In an industrial union, the local 
contains the workers in a given shop or factory. The 
national union is a federation of locals. The power and 
administrative methods of national unions vary greatly. 
In certain organizations, of which the Typographical Union 
is one, the national union — the central body — is strong 
and controls quite rigidly the locals. In others, such as 
the Barbers' Union, the central organization is weak. The 



138 ELEMENTARY ECONOMICS 

tendency in recent years is almost universally to strengthen 
the power of the national organization over the locals. 

Like the form of government of a nation, the structure and 
methods of a labor organization have been adopted in re- 
sponse to the peculiar circumstances surrounding that group 
of workers. No two classes of workers face exactly the same 
obstacles or difficulties. Some workers are skilled and not 
easily replaced; others are unskilled and always fear the 
competition of the green hand. In some cases, machinery 
modifies the conditions in the trade, as in the shoemaking 
industry; in others it does not greatly affect the situation, 
as in the case of the barbers. Again, employers are very 
hostile, as has been the case in the iron and steel industry ; 
or generally friendly, as in the stove industry. These and 
a multitude of other circumstances tend to give a peculiar 
form of organization to each union. As no two nations 
have exactly the same form of government, so no two labor 
organizations are exactly alike in form and government. 

The average unionist, like the average man, is interested 
in the things which immediately and directly concern him 
and his family. He desires immediate results which mean 
higher wages, a shorter working day, and better living con- 
ditions. The unionist like many other men may have high 
ideals ; but he is especially prone to be moved by '' bread 
and butter " logic. It must be admitted that union policies 
are the output of selfish and short-sighted groups ; and it is 
true that the labor leader, like the successful politician, is 
one who can get results which are tangible in the near future. 
In short, the member of a labor organization is possessed 
of the faults and frailties of the ordinary person in your 
community. We should be more patient with organized 
labor ; we should diligently seek for the causes of the peculiar 



LABOR ORGANIZATIONS 139 

methods and policies to which organized labor is committed. 
Invectives and unlawful persecution only aggravate the 
difficulty. Organized labor is here and here to stay. In- 
stead of attempting to smash it, we should try to under- 
stand it. 

The Industrial Workers of the World. Unlike the labor 
organizations affiliated in the American Federation of 
Labor, this union is a frankly revolutionary body. The 
Industrial Workers do not accept the present industrial 
order; they wish to overthrow it. The employer is not to 
be bargained with except in a case of necessity ; he is to be 
eliminated. Frequent strikes, the use of violence, injury 
to machinery, or concerted inefficiency — sabotage — are 
some of the weapons which the radical Industrial Workers 
of the World propose to use against the owners of capital. 
This organization is an industrial union ; trade or craft lines 
are given no consideration in the formation of the locals. 
In a given factory, all wageworkers are to be grouped to- 
gether in one local. The membership is small and fluctuat- 
ing; it consists chiefly of the unskilled and migratory or 
homeless workers. The strength of the Industrial Workers 
lies in its passionate appeal to the discontented and unsuc- 
cessful rather than in numbers or in a full treasury. Its 
stirring slogans point to class hatred and the solidarity of 
the wage-earning class. Soon after the United States was 
forced into the war in 1917, the Industrial Workers of the 
World attempted to embarrass the government by declaring 
strikes in certain important industries. This action was 
quite in harmony with the philosophy of the organization 
in regard to government and patriotism. 

Employers' Associations. Employers, as well as em- 
ployees, form unions. The corporation is from one point of 



140 ELEMENTARY ECONOMICS 

view a union of stockholders. Employers also organize fed- 
erations or unions of a different nature. One kind of union 
is called an employers' association. These associations are, 
like unions of wageworkers, both local and national, — 
city and national employers' associations. Employers unite 
to advance their own interests in various ways, and particu- 
larly to resist the aggressions of labor organizations. On 
occasion, they do not hesitate to use weapons similar to those 
used by the much criticized labor men. The lockout is 
used instead of the strike; the blacklist is the converse of 
the boycott; and spies and armed guards serve ends not 
dissimilar to those for which the union uses pickets. 

The National Association of Manufacturers is a nation- 
wide organization of employers corresponding to the Ameri- 
can Federation of Labor. City employers' associations, of 
which there are many, are similar to the city central labor 
unions. The National Founders' Association, which is 
composed of foundrymen, is the counterpart of the Inter- 
national Holders' Union. These organizations are bitterly 
anti-union. They wish to crush unionism; at least, they 
wish to crush the kind of unionism which is strong and " has 
teeth." Anti-union employers' associations assert that 
their members propose to " run their own business." They 
object to bargaining with representatives of a labor organiza- 
tion ; they stand for the " open " or non-union shop. The 
attitude of these associations has increased the danger of a 
bitter class struggle between labor and capital. 

Other associations of employers are also in existence that 
bargain with organized labor, or that are not anti-union. 
It is the plan of this type of associations to bargain collect- 
ively with the union of their employees, and to check the 
excesses of unionism. The Stove Founders' Defense Asso- 



LABOR ORGANIZATIONS 141 

ciation of stove manufacturers is of this type. For years, 
the stove manufacturers have bargained with the Inter- 
national Holders' Union; and strikes in that important 
industry have been avoided. 

TOPICS FOR DISCUSSION 

1. What labor organizations have members in your town or 
city? 

2. Are the business men organized? 

3. What is the attitude of your friends and relatives toward 
labor organizations? 

4. What is the attitude of the largest employers of labor in your 
city? 



CHAPTER XVI 
LABOR LEGISLATION 

The Labor Contract. The condition of wageworkers 
may also be improved by legislation. Unorganized workers, 
especially women and children, may be benefited by the 
passage of labor laws ; but organized labor is, in many cases, 
sufficiently strong to obtain the same ends without the 
interposition of legislative bodies. Labor legislation is a 
form of legislation which is passed primarily in order to 
improve the working conditions of wage earners; the 
ultimate aim is to raise the national efficiency. When a 
wage earner is hired a more or less formal contract is entered 
into. This labor contract — an agreement made by one 
person to perform for compensation certain services for 
another — is the result of a bargain. Labor legislation 
constitutes an interference with the right freely to make a 
labor contract. Law-making bodies recognize that as a 
rule the employer is in a more favorable position for bar- 
gaining in regard to the terms of the labor contract than 
are his employees, especially in case the latter are unor- 
ganized workers. Bargaining between employers and un- 
organized employees is known to be one-sided. From this 
point of view, labor legislation is an attempt to eliminate 
some of the conditions which make for inequality in bar- 
gaining. It is an attempt to remedy the evils of individual 
bargaining. Labor laws fix the limits beyond which no 
wage bargain can be made. 

Attitude of the Courts. In the United States, labor laws 
and other forms of legislation passed by our various legisla- 

142 



LABOR LEGISLATION 143 

tive bodies may be declared unconstitutional by the courts. 
When a law is declared unconstitutional, it becomes null and 
void and is no longer enforced. The Constitution of the 
United States was formulated and ratified before the days 
of big business, of railways, and of airships. According 
to the prevailing political theory of that period, the govern- 
ment ought not to interfere in ordinary business affairs; 
and this theory found its place in sections of the Constitu- 
tion. The wage bargain was a matter to be settled by 
the wageworker and his employer without outside or official 
interference. This theory of non-interference seems to 
have been fairly equitable in the days of small business and 
of the pioneer ; but in recent years many of the ablest men- 
and women in the land have come to believe that govern- 
mental interference in the business world is often desirable. 
Early labor laws were in great danger of being declared 
unconstitutional by the courts. Indeed, to-day, a literal 
or strict interpretation of the Constitution would cause 
many labor laws to be declared null and void. 

But the Constitution was ordained among other things 
'^ to promote the general welfare." Acting under the general 
welfare clause of the Constitution and using the somewhat 
indefinite and elastic " police power of the state," American 
courts in recent years have declared many labor laws con- 
stitutional which a few decades ago, under less complex 
industrial conditions, would have met with the disapproval 
of the courts.^ These laws are held to make for equity in 
bargaining between employer and employee, and to improve 
the health, efficiency, and welfare of the working men and 
women of the nation. The police power of the state may 

1 For a more detailed discussion of this important matter, see Carlton, 
History and Problems of Organized Labor, pp. 263-274. 



144 ELEMENTARY ECONOMICS 

be exercised to restrain the individual in order to promote 
the social welfare. Sanitary and health regulations are 
enforced by virtue of the police power. In recent years, 
American courts are ruling that certain forms of labor legis- 
lation tend to improve the health, vigor, efficiency, and 
morals of the workers and, consequently, constitute a legiti- 
mate exercise of the police power of the state. 

Laws fixing, for example, the maximum number of hours 
per day or per week which a child or a woman may work in 
a factory, interfere with the abstract right to make any kind 
of a contract which an individual may see fit or be forced to 
make. But such laws are now held to be constitutional; 
they fall within the scope of the police power of the state, 
because a long working day for women and children is con- 
sidered to be injurious. The courts were much more re- 
luctant to affirm the constitutionality of laws interfering 
with labor contracts made by adult male workers. In 1898, 
however, the United States Supreme Court decided that a 
Utah statute fixing eight hours as the legal working day in 
mines was constitutional. Mining was recognized as an espe- 
cially dangerous and unheal thful occupation. Nearly twenty 
years later, the Supreme Court gave the police power much 
wider scope by declaring an Oregon law constitutional which 
fixed at ten per day the maximum hours of labor for adult 
males, except in emergencies, in manufacturing industries. 
The health and stamina of the workers were safeguarded, 
and the limits of the wage bargain contracted by this im- 
portant decision. 

The Advantage of a Short Working Day. The success of 
a democratic form of government is dependent upon the 
character and education of the mass of its citizens. The 
long working day tends to stupefy and brutalize; the 



LABOR LEGISLATION 145 

shorter working day, on the other hand, tends to improve 
the health and efficiency of the workers, to reduce the 
amount of dissipation and intemperance, and to give the 
workers an opportunity to enjoy rational and uplifting forms 
of recreation. A short working day makes for good citizen- 
ship and for social betterment. " The first school of morals, 
family life, is a closed book against the man who only comes 
home dead tired late at night." A long working day is an 
almost insurmountable obstacle in the upward path of the 
wageworkers; and, consequently, is undesirable in a de- 
mocracy. But, granting these points in regard to the social 
value of a short working day, this question inevitably 
follows : Will the reduction of the average working day from 
twelve or more hours to ten, nine, or eight reduce the output 
of the workers of the nation ? This is an important question, 
and sufficient facts are at hand to allow a fairly convincing 
answer to be given. 

In the soft coal industry in the United States a reduction 
from ten to eight hours was followed by an increase in the 
average daily output per worker; and in the hard coal in- 
dustry a reduction from nine to eight hours led to a similar 
result. A large shoe manufacturing company found that a 
reduction from fifty-five to fifty-two hours per week re- 
sulted in an increased output per employee. A British 
official committee after a careful investigation of the health 
and output of munition workers in 1916 and 1917 reported 
" that the time is now ripe for a further substantial reduction 
in the hours of work." The facts seem to warrant the fol- 
lowing statement : The eight- and the nine-hour day make 
for good citizenship and social uplift, and also for industrial 
efficiency and increased national output. 

For years organized labor in the United States has been 



146 ELEMENTARY ECONOMICS 

striving to secure an eight-hour day. In 1912, it was esti- 
mated that nearly two millions of wage earners were working 
eight hours per day. An official investigation indicated 
that, in 1914, nearly twelve per cent of all workers in manu- 
facturing plants were working eight hours or less per day. 
Since 1914 many additions have been made to the 
number enjoying the shorter working day. In the ten 
months preceding April 1, 1916, one authority declared 
" nearly 100,000 men and women have won the eight-hour 
day in the United States.^' The federal statutes provide 
for an eight-hour day for laborers working for the federal 
government or on governmental contracts. If more than 
eight hours is worked a higher wage must be paid for over- 
time. This law may be set aside in cases of extraordinary 
emergency. 

Chief Forms of Labor Legislation. In the United States, 
the regulation of working conditions in factories, stores, 
offices, and other work-places is a state, not a federal, func- 
tion. The federal government can regulate working con- 
ditions in the District of Columbia and in the territories, 
and in the case of its own employees. In 1916, Congress 
attempted to regulate child labor in the states by passing 
a law prohibiting manufacturers from placing in interstate 
commerce, goods produced in factories employing child 
labor. This attempt to regulate factories, through the 
power of Congress over interstate commerce, was declared 
unconstitutional two years later. Each state has its own 
particular form of labor legislation; and there is as yet 
little uniformity. 

Every state of the United States and the federal govern- 
ment have passed much legislation in regard to working 
conditions in factories and other work-places. Labor legis- 



LABOR LEGISLATION 147 

lation relates to a variety of different subjects, — such as 
provision for factory inspectors, the Kmitation of the length 
of the working day and the number of working days per 
week, prohibition of night work and of Sunday labor, ex- 
clusion of women and children from certain kinds of employ- 
ment, provisions for frequent payment of wages, laws fixing 
a minimum wage for women and children, requiring the use 
of certain safety appliances, regulations in regard to sanitary 
conditions in factories and other work-places. The enforce- 
ment of labor legislation is usually placed under the control 
of a commissioner of labor or an industrial commission di- 
recting a corps of factory inspectors. 

Legislation in Regard to Child and Woman Labor. Every 
state in the Union has passed some legislation relating to 
the work of children. The typical law in the Northern 
and Eastern states prohibits the employment of children 
under fourteen years of age in factories, stores, workshops, 
and mines. In dangerous or unheal thful employments, the 
limit is raised. In the street trades and in agriculture, the 
limit is lower or no limitation is provided. As a rule chil- 
dren between the ages of fourteen and sixteen years are 
obliged to obtain working papers indicating that they are 
in good health, that they have completed a minimum amount 
of schooling, and that the family needs their earnings. 
Night work is prohibited in some of the states; and the 
working day for children is fixed in many states at eight or 
nine hours. The laws in the Southern states are less rigid 
than those in the North; but the standards have been 
raised in recent years. 

The great majority of American states have passed laws 
regulating the labor of wage-earning women. Nearly a 
score of states provide for a maximum working day for 



148 ELEMENTARY ECONOMICS 

women, of eight or nine hours. Night work is prohibited 
in a few states. Many health regulations relating to work- 
ing women are found upon our state statute books. Twelve 
states have passed laws fixing a minimum wage for women 
and children. Employers are not allowed, under penalty, 
to pay less than the minimum wage. This wage is usually 
determined by a wage board and is the amount considered 
necessary to maintain the health and efficiency of the 
worker; it is a "living wage." No minimum wage law 
has been passed in the United States for adult male workers. 

Throughout the ages women and children have performed 
much hard labor. The dangers which our legislatures 
attempt to guard against are found in connection with the 
conditions of work in our factories, sweat-shops, offices, 
and stores, — routine, the long working day, insanitary 
conditions, speeding-up, etc. Child labor in modern routine 
industry is an economic mistake as well as undesirable from 
a humanitarian point of view. A child is not only entitled 
to childhood, but we are coming to see that child labor 
does not pay. It is an expensive and inefficient form of 
labor for the employer to hire; and it tends to make in- 
efficient the next generation of adult workers. The child 
forced prematurely into routine industry is obliged to forego 
desirable schooling, and his stamina and vigor are reduced. 
The use of child labor in mill and mine is like " grinding the 
seed corn." The agitation against gainful child labor and 
in favor of better educational facilities for the youth, is an 
essential part of the program for the conservation of human 
resources. 

It seems evident that women are to play a larger and 
larger role in the industrial world. An attempt to stem 
the tide and to force women out of the factory, office, and 



LABOR LEGISLATION 149 

store does not seem feasible or desirable ; the problem is to 
improve working and living conditions so that the health 
and stamina of the wage-working women will not be im- 
paired. The solution lies in humanizing industry. The 
woman wage earner is not an abnormal person. Idleness 
or the performance of useless or unnecessary work is un- 
desirable in the case of women as well as of men. The work 
of women under good conditions will increase the productive 
capacity of the nation and will allow a further reduction of 
the working day, or an increase in the sum-total of necessi- 
ties, comforts, and luxuries available for consumption, or 
both. 

TOPICS FOR DISCUSSION 

1. What are the chief provisions of your state law in regard to 
the work of women and children? 

2. Of men? 

3. Who is charged with the enforcement of these laws? 

4. How many wageworkers in your city or town are employed 
eight hours per day ? Nine hours ? Twelve hours ? 



CHAPTER XVII 
METHODS OF PAYING FOR LABOR 

The wages actually paid an employee are, as has been 
indicated, the result of an individual or a collective bargain. 
The method of paying for labor is by no means a matter of 
indifference. Employers are eager to adopt a plan which 
will stimulate the worker to produce in an efficient manner ; 
they wish a large output of good quality unaccompanied by 
unnecessary waste of materials or excessive wear and tear 
upon the machinery utilized. The employees desire to in- 
crease the wage rate; but they object to overdriving or 
" sweating." Under slavery practically the only incentive 
was fear; under the wage system, the desire for income, 
which enables the worker to get a living for himself and 
family, is the chief incentive for the great majority of wage- 
workers. Many different methods have been and are still 
used in paying for labor. In this chapter, five systems will 
be briefly presented, — time wage, piece wage, premium 
plans and scientific management, profit sharing, and coopera- 
tion. Cooperation is, strictly speaking, not a method of 
wage payment ; it is, in reality, a scheme for social reform. 
The time and piece wage systems are the fundamental plans ; 
other methods are merely modifications of one of these 
systems. 

Time Wage. In the time wage plan, the base upon which 
payment is made is a unit of time, — one hour, one day, one 
week, one month. The employee receives the stipulated 
wage for each unit of time employed irrespective of his 

150 



METHODS OF PAYING FOR LABOR 151 

output for that period. More efficient and less efficient 
employees may receive the same wage. Of course, if a 
worker habitually produces little, he will sooner or later be 
discharged. Under the time wage system, the tendency 
is for wages to be nearly uniform for all workers in a given 
factory performing a certain kind of work. There is little 
incentive for the fast and skillful man to quicken his pace 
and increase the amount or improve the quality of his output 
per day. The time wage plan is favored by many labor 
organizations. In case the material used is very expensive 
or the machinery employed is delicate and costly, employers 
usually favor the time wage system. 

Piece Wage. Under this plan the workers are paid 
according to the quantity of work finished. If a man com- 
pletes one hundred operations in a day, his wage may be, 
for example, three dollars, — three cents per operation. If 
he had completed only seventy-five operations his wage 
would have been reduced to two dollars and twenty-five cents 
per day. The wage received depends upon the output of 
the individual worker. The worker is furnished a very 
direct incentive for speeding up. As a consequence, quality 
is in danger of being sacrificed to speed under the piece 
work plan. Piece rates are based on the principle of stren- 
uosity, not that of efficiency. The workers often refrain 
from speeding up because they fear the employer will cut 
the piece rate if they earn more than is the customary time 
wage for the same class of work. Piece workers, therefore, 
often deliberately restrict their output. 

Premium Plans and Scientific Management. The diflfi- 
eulties connected with both time and piece wages have led 
employers to seek another form of wage payment. The 
premium plan is, generally speaking, a combination of 



152 ELEMENTARY ECONOMICS 

the time and piece wage. The worker as a rule receives his 
day wage irrespective of the amount turned out by him in a 
day; but, if his output exceeds a certain amount, he is 
given a premium or bonus in addition to his day wage. The 
greater the excess over the base, the larger the premium. 
As in the piece wage system, the worker is given a potent 
incentive to increase his output. The essential difference 
between the two systems is found in the method of fixing 
the rate. The piece rate wage is usually the result of a 
more or less intelligent guess. Under scientific management 
the premium rate is fixed after careful study of the amount 
♦ which an efficient worker ought to turn out in a given work- 
ing period. The employer then promises not to cut the 
rate unless some change is made in the methods employed. 
One of the functions of scientific management is to ascertain 
what is a fair day's work ; and another is to determine the 
premium rate which will give the worker the incentive to 
do more. 

Scientific management or efficiency engineering also aims 
to ascertain the most effective way of doing a given job 
whether it be shoveling coal, handling pig iron, laying bricks, 
or cutting steel in a lathe. Every operation from tying a 
necktie to building a Panama Canal may be done in an 
efficient or an inefficient manner. Scientific methods are 
those which enable the job to be done in the most effective 
way with the least possible waste of energy. Labor power 
is now a measurable quantity. Under this system the 
efficiency of a worker is measured as definitely as electrical 
energy or steam power may be ascertained. The adoption 
of scientific methods marks the end of rule-of -thumb processes 
and guesswork. Under scientific management unnecessary 
motions are eliminated, the proper sequence of operations is 



METHODS OF PAYING FOR LABOR 153 

ascertained, and the best routing of materials and of partially 
finished products is determined. Some of the gains made 
as the result of motion study and the application of scientific 
principles to such work as bricklaying or shoveling, are con- 
siderable. For example, it is reported that through the use 
of scientific management one company " cut its shop force 
from one hundred to seventy men, and at the same time 
increased its output three hundred per cent." 

Organized labor has quite consistently opposed the in- 
troduction of scientific management. The workers fear 
that it only means some subtle and new-fangled scheme to 
overdrive them. They point to the fact that scientific 
management has been introduced by the employers without 
consultation with the workers affected; and that it is 
planned by experts hired, controlled, and compensated by the 
employers. In theory, scientific management will help the 
workers; in actual practice, in too many cases the workers 
have received very little or no beneficial results. The op- 
position of organized labor to scientific management would 
doubtless be removed in a large measure if the workers 
were given a voice in determining the methods to be em- 
ployed. 

Profit Sharing. Profit sharing supplements, but does 
not modify in any important manner, the ordinary methods 
of paying wages. The workers are paid time or piece wages, 
and at the end of a definite period of time, usually one year, 
a portion of the profits is divided among them . This dividend 
is a gift made by the employer. If profit sharing is under- 
taken by the employer as a business proposition instead of 
a matter of philanthropy, the end in view is greater output, 
less waste of material, less wear and tear upon machinery, 
and a more stable labor force. Under the ordinary wage 



154 ELEMENTARY ECONOMICS 

system, wages are fixed at a contractual amount; ordinary 
fluctuations in business activity do not affect the rate paid. 
But the profits to be divided under profit sharing are subject 
to all the vicissitudes of business, for profits depend upon 
the ability of the enterpriser, the conditions of the market, 
the efficiency of the factory organization as well as upon 
the efficiency of each and every individual worker. The 
wageworkers may put forth their best efforts as the result 
of a promise to share profits and yet, owing to bad manage- 
ment or adverse business conditions, receive no extra bonus 
at the end of the financial year. Under piece wages or the 
premium plan the amount of the bonus depends almost 
entirely upon the individual workman, and the extra amount 
earned is found in the next pay envelope instead of six or 
twelve months later. The incentive offered by profit shar- 
ing has not proved very potent in its effect upon individual 
workers. 

Profit sharing has been tried in only a comparatively 
small number of American factories. In 1916, only sixty 
establishments in the United States were using some form 
of profit sharing; one third of this number had adopted it 
within three years ; and only eight out of the total number 
adopted the plan before 1900. Only five of the sixty es- 
tablishments employ over one thousand workers. Labor 
organizations oppose profit sharing. Labor leaders feel 
that a wage earner who is also a profit sharer will be less 
loyal to his union than one who receives only wages. Union- 
ists demand higher wages rather than a share in the profits. 
To members of a labor organization the strength of the 
union is of first importance; any plan of wage payment 
which is considered to be a menace to thfe solidarity of 
labor will meet the opposition of organized labor. Profit 



METHODS OF PAYING FOR LABOR 155 

sharing has been most successful in plants which are not 
subjected to fierce competition. A firm enjoying large 
monopoly profits can adopt profit sharing with excellent 
prospects of success. 

" Working on shares " may be called a crude form of 
profit sharing. In farming and in fishing, working on 
shares is not uncommon. Welfare work also has some of 
the earmarks of profit sharing. Many employers in recent 
years have given much attention to improving working 
conditions in the factory, — better lighting, improved 
sanitation, shower baths, rest-rooms, gymnasiums, meals 
at cost served in an attractive dining room. Attention 
has also been directed toward the home environment of 
the workers. '' Model houses " have been erected ; these 
houses have been sold or rented to the workers at reason- 
able rates. Cooperative stores have been established; 
and night schools and kindergartens provided. Welfare 
work has taken on many different aspects. In brief, it is a 
movement fostered by employers looking toward better 
working and living conditions for wageworkers. Organized 
labor insists that welfare work must not be used as a sub- 
stitute for higher wages. In short, they prefer more money 
in the pay envelope to shower baths and flower gardens in 
their work-places. 

Cooperation. Cooperation is a form of democracy in 
industry.^ A factory operated under cooperative methods 
will be managed by the workers in that factory ; the workers 
collectively constitute the enterpriser. To the workers, 
therefore, go both wages and profits. The workers select 
the superintendent, and determine the policy of the organiza- 

1 See also the section on Cooperation in the chapter on Forms of Business 
Organization. 



156 ELEMENTARY ECONOMICS 

tion. In the pure form of producers' cooperation each worker 
will have one vote, and all workers in the plant will be 
members of the cooperative association. The employer is 
eliminated ; the workers literally employ themselves. They l| 
furnish or borrow the capital necessary to carry on the 
enterprise. Theoretically the system appeals to the lovers 
of equality; but, in actual practice, few attempts at pro- 
ducers' cooperation have been successful. The most notable 
example in the United States has been furnished by the 
flour-barrel coopers of Minneapolis. 

The difficulties are many. In the first place, a manual 
worker rarely places sufficient emphasis upon managerial 
ability; and, hence, the managers chosen are poorly paid 
and are as a rule inefficient. In the second place, a success- 
ful cooperative establishment almost inevitably drifts 
toward the condition of a corporation. The original mem- 
bers wish to keep the profits for themselves. Soon they 
begin to hire workers, paying the latter ordinary wages instead 
of admitting them as cooperators. Presently cooperation 
in the establishment is a matter of history; and the plant 
is really operated by a partnership or by a corporation. 
It is also difficult for cooperating workmen to obtain sufii- 
cient capital efficiently to carry on many lines of business. 
In a complex industry in which many grades of workers 
skilled and unskilled are employed, the question of relative 
shares in the proceeds is a rock upon which the cooperative 
concern is likely to be shipwrecked. The unskilled object 
to allowing the skilled a much larger per capita percentage 
than the former receive; and the skilled emphasize the 
difference between the two grades of labor. The most 
successful examples of producers' cooperation are found in 
industries in which there is little gradation of labor, in which 



METHODS OF PAYING FOR LABOR 157 

the amount of capital required is small, and in which the 
work of the enterpriser is reduced to a minimum. The 
flour-barrel industry conforms fairly well to these require- 
ments. 

The more important form of cooperation is found among 
consumers rather than among producers. The cooperative 
store has proved successful in many cases, particularly in 
England. In a cooperative store, interest is paid upon 
the capital invested; the profits over and above expenses 
are divided among the purchasers, who are members of the 
cooperative association in proportion to the amount of their 
purchases. That is, the profits go to the cooper ators in- 
stead of to an enterpriser. The clerks and the manager 
of the store are paid wages. To be a member of the as- 
sociation, a person must buy at least one share of the stock 
of the association. But, unlike a corporation, each mem- 
ber is allowed only one vote irrespective of the number of 
shares he may have purchased. Many cooperative enter- 
prises have been started among farmers, — such as coopera- 
tive creameries and grain elevators, and cooperative as- 
sociations for marketing fruit. The familiar building and 
loan associations are also forms of cooperative enterprises. 
Cooperation among consumers does not, of course, affect 
directly money wages ; but, by reducing the purchase prices 
of consumable goods, consumers' cooperation tends to in- 
crease wages in terms of consumable goods, that is, real wages. 

TOPICS FOR DISCUSSION 

1. Do you know of any factories in your community in which 
time wages are paid? 

2. Piece wages ? 

3. Some form of the premium plan used? 

4. Are there any examples of profit sharing? 

5. Of a factory operated under cooperative management ? 



CHAPTER XVni 
AGRICULTURAL ECONOMICS 

Farming Is a Business. Agriculture is a basic industry. 
In a crisis a nation can dispense with many forms of human 
endeavor and many kinds of industry; but the farming 
business must go on. In the early history of the United 
States, farming was the chief occupation of the great ma- 
jority of Americans. To-day, it is rivaled by manufacture, 
transportation, and mining. About one-third of all persons 
gainfully employed in 1910 were reported as engaged in 
agriculture; and the estimated value of all farm property 
was approximately one-fourth of the estimated wealth of 
the nation. 

The farmer of to-day is truly a business man; he pro- 
duces chiefly for sale — for a market. The pioneer farmer 
and his family on the other hand consumed nearly all that 
was produced upon the farm; little was sold and little 
purchased by the pioneer farmer. The frontier farm was 
almost a self-contained unit. 

Peculiarities of the Business of Farming. Farming con- 
sidered as a business or a means of getting a living has, 
however, several peculiarities which quite clearly distinguish 
it from all other industries. These peculiarities are less 
marked in the case of the modern marketing farmer than 
in the case of the pioneer. (1) The farmer comes into very 
close touch with nature. His work brings him daily into 
contact with the soil and vegetation; it does not oblige 
him to cooperate or work with other men to the extent that 
manufacturing, mining, and merchandising do. His busi- 

158 



AGRICULTURAL ECONOMICS 159 

ness does not require the careful cultivation of the social 
graces; he therefore often appears at a disadvantage in 
social and political gatherings. (2) The pioneer farmer 
has often been lauded as an independent man. He was in 
a large degree independent of social, political, and business 
considerations; but on the other hand he was peculiarly 
dependent upon weather conditions, and the danger of loss 
from pests of various kinds was ever present. The market- 
ing farmer is almost as dependent upon political and bus- 
iness considerations as other business men. He is vitally 
interested in railway rates, banking laws, credit facilities, 
and the control of middlemen. And some farmers are 
becoming nearly as independent of weather conditions as 
the manufacturer, — for example, the farmer upon irrigated 
land and the market gardener who works under glass. 

(3) Subdivision of labor has proceeded much further in 
manufacturing, transportation, mining, and mercantile pur- 
suits than in agriculture Farming is relatively a small- 
scale industry; and small-scale industry offers slight op- 
portunity for subdivision of labor. Farming is also a 
seasonal industry; the character of the work performed 
changes from season to season and from day to day. No 
two days have exactly the same routine ; and an unexpected 
change in the weather will upset any carefully planned 
program of farm work. The farmer is even to-day a non- 
specialized worker. He must be able to plow, sow, culti- 
vate, reap, repair implements and fences, milk cows, care for 
horses and stock, and perform a multitude of other duties. 
The efficient farmer is a versatile and ingenious man. He 
should not only understand the best methods of doing 
farm work; but he also must understand soils-, he must 
study market conditions, he must know how to fight insect 



160 ELEMENTARY ECONOMICS 

pests, and he should be able to keep simple farm accounts. 
The efficient farmer of to-day is a worker and an enter- 
priser. The distinct separation between the capitalist, the 
enterpriser, and the worker which is characteristic of manu- 
facture, mining, and transportation, is as yet rarely found 
in agriculture. The farmer works with his farm laborers, 
if indeed he hires such assistance. 

(4) The farm family, like all families under more primi- 
tive industrial conditions, is united in an industrial way. 
Each member of the household contributes his bit to the 
farm business. In manufacture, mining, transportation, 
and nearly all other forms of business activity, the home 
life and household activity are sharply separated from 
business activity ; and different members of the family are 
often engaged in quite different work. The rural family is 
a united working force, and all members work together for 
a common end; the urban family constitutes a divided 
working force. Unity in the essential endeavor to earn a 
living undoubtedly makes for family stability. The wife 
of the farmer is in reality his business partner; and the 
location of the farm definitely fixes the residence of the 
farmer. (5) Manufacture tends to produce the massing of 
population in industrial towns and cities; farming because 
of the large space required by each farm unit, causes the 
farming population to live in relative isolation. (6) The 
isolation of the farm and the small-scale form of the average 
farm unit, have made it difficult for farmers to cooperate 
with each other and to do teamwork in organizations for 
the benefit of the rural community. The farmer is hard 
to " socialize." 

Agricultural Statistics. In the United States, according 
to the Census of 1910, there were 6,361,502 farms. The 



AGRICULTURAL ECONOMICS 161 

average number of acres per farm was 138. The average 
value of all farm property per farm was $6444; of which, 
$4476 represented the value of the land. During the decade, 
1900 to 1910, the value of the farm land per farm in the 
United States practically doubled; and the value of all 
farm property per farm increased about 80 per cent. This 
extraordinary increase in farm values was due in part to 
changes in the value of gold. The total value of farm prop- 
erty per farm in 1860 was slightly less than in 1900. The 
average number of acres per farm in 1860 was 199 and in 
1900, 146. 

Farm Tenancy. As a rule, a farm is more efficiently 
operated by the owner than by a tenant. Tenancy is par- 
ticularly undesirable when the landowner lives at a con- 
siderable distance from the farm and when a tenant only 
remains on a farm for one or two years. Under such con- 
ditions, the rented farm is usually " skinned " or " mined " ; 
the soil deteriorates and the buildings and fences decay. 
Fortunately, absentee landlordism has not as yet assumed 
alarming proportions in this country. In 1910, 63 per cent 
of the farms were operated by the owners; in 1900, the 
percentage was 64.7. Of the 37 per cent operated by 
tenants, three-fourths were owned by landlords living in 
the same county in which the farm was located. Tenancy 
is high in several Southern states on account of the large 
number of Negroes renting small farms. With some ex- 
ceptions, the percentage of tenancy in the North is highest 
where land values are high, where the investment required 
of the owner is considerable. 

Farm Labor. The farmer has a " labor problem." It is 
difficult for farmers to obtain an adequate supply of efficient 
workers; and from year to year they loudly bewail the 



162 ELEMENTARY ECONOMICS 

scarcity of farm laborers. The reasons for this situation are 
many. The demand for workers on the farm fluctuates 
greatly within a given year. The need for workers is most 
pressing in the fall during the harvesting season; in the 
winter, on the contrary, few extra helpers are required. 
The working day is long and, as a rule, indefinite. The 
opportunities for recreation and social enjoyment are few 
and inadequate. In many cases the housing accommoda- 
tions are very poor, — often worse than in the case of factory 
workers. 

In short, city employment with a higher money wage, a 
shorter working day, more regular hours, better oppor- 
tunities for recreation and less of isolation, is the magnet 
which has drawn many of the best workers away from 
agriculture. There are perhaps 5,000,000 agricultural la- 
borers. The typical member of this group, if located west 
of the Mississippi River, is a migratory or drifting worker. 
He works here to-day and elsewhere next week ; and in the 
winter he drifts into the cities too often only to add to the 
amount of idleness and debauchery in those centers of 
population. 

Rural Social Problems. Too many capable persons have 
been leaving agriculture for other occupations and oppor- 
tunities. In the past, the rural districts have constituted 
the reservoir from which the cities have received their best 
leaders. To-day cities must very largely recruit their ranks 
from within ; but it is still of prime importance that the 
quality of the rural population be maintained at a high level. 
The " rural exodus '^ has not, however, been entirely a move- 
ment from the farms to the cities. With the passing of 
recent decades certain small rural industries such as black- 
smithing have very largely disappeared. The sons and 



AGRICULTURAL ECONOMICS 163 

daughters of the village and crossroads blacksmith are now 
living in the city. Many farmers have moved farther west 
or to Canada. During the last two or three decades the 
strictly rural population living in the open country or in 
small villages under 2500 inhabitants, has been actually 
reduced in numbers in many of the older states. For ex- 
ample, out of a sohd block of twenty-eight counties in South- 
eastern Michigan only one county increased in rural popu- 
lation from 1900 to 1910. The percentage of the entire 
population of the United States living in the rural district 
was, in 1860, 70.5; in 1890, 63.9; in 1900, 59.5; and in 
1910, 53.7. It is true that many old-time jobs such as the 
making of tools and implements, the slaughtering of cattle 
and hogs, the manufacture of cheese and butter, have been 
transferred from the farm and the rural hamlet to the factory 
and the city; and it is also true that improved machinery 
and motive power enables the same amount of man-power 
to cultivate efficiently a greater acreage of ground; but in 
spite of these facts, students of rural conditions are of the 
opinion that more attention should be given to the prob- 
lems of the farmer and of the rural community. Why are 
so many of the virile and ambitious young men and women 
turning their faces cityward ? 

No definite and entirely satisfactory answer can be given 
to this question; but a few hints may be offered. In the 
cities are found crowding, hustle, noise, allurement, excite- 
ment, opportunity for distinction and wealth. In the 
cities also are to be found good sanitation, playgrounds, 
well-organized schools, well-equipped churches, public 
libraries, social centers, and varied opportunities for amuse- 
ment and recreation. Farmers rarely attain to great wealth, 
distinction, or political preferment. The best arid the worst 



164 ELEMENTARY ECONOMICS 

sides of life seem to be found in our large population centers. 
To many persons the rural districts appear to offer only the 
chance for hard work, small income, mediocrity, and mo- 
notony. The lure of the farm may be strengthened by 
increasing the income of the farmer through greater in- 
dividual efficiency and through the association of farmers 
in organizations which are not unlike labor organizations. 
Better rural schools, consolidated and more prosperous 
rural churches, opportunities for social gatherings and 
wholesome recreation, improvement of roads and of other 
means of transportation and communication, are also potent 
agents in adding to the attractiveness of rural life. Agri- 
culture and the rural districts will attract and retain the 
leaders of this or any other generation only when the op- 
portunities and enjoyment afforded compare favorably 
with those of other occupations and of urban life. 



CHAPTER XIX 
INSURANCE 

What is Insurance? Insurance is a method of coopera- 
tion in the bearing of risks against such emergencies as fire, 
death, sickness, and a multitude of other misfortunes which 
are quite certain, within a given period, to come to a fairly 
definite number of persons belonging to a large group. 
That a certain percentage, for example, of 100,000 persons 
will die within a year can be predicted with a fair degree of 
accuracy; but which particular individuals will die is not 
ascertainable. Property may be insured against many kinds 
of risks such as of fire, tornadoes, floods, theft. The in- 
sured persons or the owners of insured property pay a small 
annual premium; and those of the total number insured, 
or their families, to whom comes the misfortune insured 
against, receive an indemnity which partially or wholly 
compensates for the loss sustained. 

Insurance of property may be considered as an expense 
of doing business. A manufacturing plant insures its build- 
ings and equipment against fire or a wind storm. A cargo of 
goods shipped by railway or by steamboat is usually insured. 
If the building burns or the cargo is lost, the owner is recom- 
pensed by the insurance company; and the former con- 
tinues his business without the great financial strain and 
the danger of bankruptcy which would often follow in case 
no insurance were carried. On the other hand, life insur- 
ance may be considered to be a form of savings. In the case 
of the death of the breadwinner of a family, the widow and 

165 



166 ELEMENTARY ECONOMICS 

the children will be assured an income or a lump sum of 
money from the insurance company. Banks usually insist 
that property offered as security for loans be insured. Ac- 
ceptances based upon shipments of goods are readily dis- 
counted by banks if the shipments are insured.^ Insurance 
plays a very important role in business affairs of to-day. 
The amount of the policies of American life insurance com- 
panies in force at the end of the year 1916 was over twenty- 
one billions of dollars.^ In addition, much life insurance is 
carried by insurance fraternal orders. The life and property 
insurance companies have enormous sums of money in- 
vested in many kinds of financial securities. Each state has 
passed rigid laws regulating the management of insurance 
companies. 

Social Insurance. Social insurance is a special form of 
insurance which is designed to protect wage earners from 
certain misfortunes to which they are especially exposed. 
The forms of insurance described above are purely volun- 
tary; but social insurance is usually compulsory. The 
chief kinds of social insurance are : workingmen's compensa- 
tion or insurance against industrial accidents, health (or 
sickness) insurance, insurance against invalidity and old 
age, and involuntary unemployment insurance. Until 
recent years Americans have urged that workingmen, by 
means of thrift, should individually prepare to meet these 
emergencies. But experience has conclusively proved that 
for the great mass of wageworkers, savings are inadequate 
to afford protection against the ordinary vicissitudes of 
life. Large numbers of families in the United States do 
not receive sufficient income to warrant any attempt to 

1 See Chapter X. 

2 Reported to the New York Insurance Department. Some American 
insurance companies do not report to the New York authorities. 



INSURANCE 167 

save for old age or for the proverbial '' rainy day." With- 
out some form of social insurance, too many families in the 
wage-working group are forced because of accident, illness, 
or unemployment to accept public or private charity with 
its accompaniment of humiliation and loss of efficiency. 
Social insurance is the modern and humane method of 
making provisions for the ordinary misfortunes of the 
family receiving a small income. 

Workingmen's Compensation. Insurance against indus- 
trial accidents is the only form of social insurance which as 
yet has found a foothold in the United States. The im- 
portant European nations have preceded the American 
states in adopting systems of social insurance. The first 
fairly adequate American compensation law was passed in 
New York in 1910 ; this act was soon after declared uncon- 
stitutional. The first law to stand the legal tests was 
passed by the legislature of Massachusetts in 1911. By 
May, 1918, thirty-eight states and the federal government 
(for federal employees) had passed compensation acts; 
and these acts whether compulsory or optional are now 
held to be constitutional. 

While these laws differ in details, the essential features 
are not greatly dissimilar. The expense of the system is 
paid by the employer; it, like the cost of fire insurance, is 
considered to be a regular expense of the business. An 
industry in which the hazards are considerable will be re- 
quired to pay higher premiums or compensation than one 
which is less hazardous. An employer who neglects to 
guard his machinery will be forced to pay higher premiums 
for accident insurance than his competitor who installs 
safety appliances. A well-drawn compensation act makes 
" safety first " profitable ; it lowers the expense of operation 



168 ELEMENTARY ECONOMICS 

by reducing the amount paid to workmen because of acci- 
dents. 

The amount of the compensation paid because of the 
non-fatal injury of an employee is usually determined by 
paying during disability a percentage of the average wages 
earned by the worker. In the best laws the percentage is 
fixed at sixty-six and two-thirds. In the case of a fatal 
accident, the family receives a percentage of the weekly 
wage of the deceased. The exact percentage is determined 
by the number of dependents. The amount allowed each 
child should be paid until the child dies or reaches the age 
of eighteen years. The widow should receive compensa- 
tion until death or re-marriage. In addition funeral benefits 
and medical care are usually provided for. 

The system is placed under the control of a state com- 
mission which has power to settle disputes. Resort to the 
courts, except in rare cases, is avoided. The compensation 
system can be administered without great expense; and 
the amount of the payment is definite. Payments begin 
soon after the accident and continue regularly. The em- 
ployer usually insures against accidents in a mutual or other 
insurance company or through the state insurance depart- 
ment. The premiums are paid to the insurance company; 
the compensation is paid by the insurance company to the 
injured worker or to his family as required by law. As a 
rule farm laborers, domestic servants, and casual laborers 
are exempted from the provisions of the compensation laws. 

Health Insurance. The sickness of wage earners is a 
more important cause of interrupted wages than accidents. 
Practically all the leading industrial nations of Europe have 
adopted some form of health insurance; but in the United 
States (1919) health insurance has not been adopted by any 



INSURANCE 169 

state. The American Association for Labor Legislation, 
which was instrumental in pushing the campaign for work- 
ingmen's compensation, has for several years carried on a 
campaign of education in regard to the merits of health in- 
surance. A standard health insurance bill has been drawn 
up by this Association after much study and criticism. It 
seems probable that the chief features of this measure will 
be included in the state laws if such measures are passed 
in the near future. 

This tentative measure provides for compulsory insur- 
ance against the sickness of all wageworkers whose earnings 
do not exceed one hundred dollars per month, except casual 
and home workers. The benefits, in case of the illness of 
the wage earner, are to consist of cash benefits, medical and 
nursing attendance, medicines and surgical supplies, etc. 
It is provided that the cash benefit shall be paid beginning 
with the fourth day of illness and continue during disability 
but not more than thirteen weeks in one case of sickness 
nor more than twenty-six weeks in any consecutive twelve 
months. The amount paid shall be not more than sixty-six 
and two-thirds per cent of the weekly wage of the insured 
worker. 

The premiums for health insurance should be paid by 
contributions from the employer, the employee insured, and 
the state government. The act drawn up by the American 
Association for Labor Legislation provides that forty per 
cent of the total premium be paid by the employer, forty 
per cent be deducted from the wages of the insured, and the 
remaining twenty per cent paid out of the state treasury. 
The insurance may be carried by mutual or other insurance 
companies or by the state insurance department. The 
system should be controlled by a state commission. 



170 ELEMENTARY ECONOMICS 

The*total expense of health insurance in all the states of 
the United States would be perhaps a billion dollars per 
year. Such a large expenditure can only be justified if it 
will reduce the amount of sickness and obviate the necessity 
for many famihes of workingmen to depend upon public 
or private charity in times of sickness. The student of 
social insurance must not overlook the incentives to 
fraud and malingering in order to receive the sickness 
benefits. 

Old- Age Insurance. Social insurance for old age is in 
two forms: compulsory insurance and a pension system. 
Germany and France use the former system; England, 
Belgium, Denmark, New South Wales, Victoria, and New 
Zealand adhere to the pension system. In Germany, the 
imperial government contributed approximately twelve 
dollars per year toward each pension for old age or in- 
validity. The remainder of the expense is divided equally 
between employer and employee. Under the English law 
every worthy wage earner in poverty who has reached the 
age of seventy years is granted a small yearly pension. In 
Denmark, the age limit is sixty years. A large percentage 
of American wageworkers are in poverty and dependence 
after their sixty-fifth year ; one authority in 1912 estimated 
the number to be one and one-fourth million. A pension 
which would give to each member of this group a meager 
income would relieve and prevent much suffering and 
humiliation; but the expense of the system would be con- 
siderable. An old-age insurance system with governmental 
aid seems preferable. More liberal amounts could be al- 
lowed as pensions, and thrift would be given greater en- 
couragement than under a pension system lik^ that of 
England. 



INSURANCE 171 

Unemployment Insurance. One of the most serious mis- 
fortunes which the wageworkers confront is involuntary 
unemployment. Statistics show that even in times of 
prosperity many workers are involuntarily idle; and in 
periods of depression the percentage often becomes alarm- 
ingly great. Unemployment insurance is the most difficult 
form of social insurance to administer properly. It is easy, 
and to many alluring, to pretend to be unable to obtain a 
job. Obviously, any plan of unemployment insurance must 
be supplemented by excellent means of applying work tests 
to the person who asks for unemployment benefits. Be- 
fore unemployment insurance can be adopted on a large 
scale a general and well-organized system of employment 
bureaus is undoubtedly essential. Such a system appears 
to be in the making in the United States. 

Certain cities of continental Europe, notably Ghent in 
Belgium, have instituted optional systems of unemploy- 
ment insurance for a limited number of workers. Great 
Britain is the only nation to establish a nation-wide com- 
pulsory system. This act was passed in 1911 and covers 
workers in seven different industries. The first step taken 
was the organization of an extensive system of employ- 
ment bureaus covering all parts of the Kingdom. Equal 
contributions are made by employer and employee, and the 
government adds a subsidy. Insurance benefits may be 
paid for not more than fifteen weeks in any year. To re- 
ceive unemployment benefits, the worker must be " em- 
ployable " and he must be required to present himself at 
an employment bureau each day while receiving benefits; 
and he must of course accept a suitable job if offered to him. 
As incentives for the reduction of unemployment a refund 
of a portion of his contribution is made to an insured worker 



172 ELEMENTARY ECONOMICS 

who has had steady employment for a certain period, and 
a refund is also given an employer who has kept his em- 
ployees continuously on the pay-roll for a year. As this 
initial attempt on a large scale to reduce the evil effects 
of unemployment was in effect only three years before the 
war opened, it is not possible to judge of the success of the 
system under normal conditions. 

Provisions for Enlisted Man and Their Families. Soon 
after the United States entered the war a fairly compre- 
hensive compensation and insurance measure was passed 
by Congress. This act was drawn after a careful investi- 
gation and displaces the old, unsystematic, and unscientific 
pension scheme of preceding years. War is recognized as 
an extra-hazardous industry, and as one which profoundly 
disturbs ordinary family relations and cuts off in the ma- 
jority of cases the ordinary income of the family of the 
soldier or sailor. The law provides a governmental system 
which assures the family of the enlisted man a modest in- 
come while he is in the service of the nation or in case of 
his injury or death. The principles of social insurance are 
applied to the soldier and sailor by the federal government. 

The chief features of the act may be presented under 
four headings : (a) Allotments and Allowances. All en- 
Hsted men are required to make allotments of pay for the 
benefit of wife and children. The monthly compulsory 
allotment shall not be more than half pay nor less than fif- 
teen dollars. The government makes an allowance of fifteen 
dollars per month if there be a wife but no children; of 
twenty-five dollars if there be a wife and one child; of 
thirty-two dollars and fifty cents if there be a wife and two 
children. For each additional child an additional five 
dollars per month is allowed. If the family of an enlisted 



INSURANCE 173 

man consists of a wife and two children, the compulsory 
allotment and the governmental allowance gives them a 
monthly income of $47.50. Provisions are also made for 
children in case the wife is dead and for other dependents.^ 
(b) Compensation in Case of Death or Disability. In case 
of the death of an enlisted man, the government allows 
twenty-five dollars monthly compensation to the widow 
and additional allowances for minor children. The com- 
pensation of the widow continues until death or re-marriage, 
to the children until eighteen years of age or until married. 
Provisions are also made in case of total or partial disability 
of the soldier or sailor, (c) Voluntary Insurance. Life 
insurance companies demand extra war premiums of officers 
and enlisted men. The law, therefore, provides for volun- 
tary governmental insurance at low rates against death or 
total disability. The amount of insurance may not be less 
than $1000 nor more than $10,000. (d) Vocational Train- 
ing for Injured Men. The government is also to make 
provision for the training of disabled men for suitable trades 
or occupations. 

TOPICS FOR DISCUSSION 

1. What is the fire insurance rate in your town or city? Is it 
higher or lower than in other cities of approximately the same 
population ? 

2. Has your state a workingmen's compensation law? What 
are its chief features ? 

3. Has there been any agitation for health insurance in your 
state ? 

1 Officers are not included under the provisions of this portion of the act. 



CHAPTER XX 
MARKETING 

Inefficient Methods. The growth of cities, more in- 
tricate division of labor, and the increasing complexity of 
modern industry have stretched the distance from the 
producer to the consumer and have made possible the inter- 
vention of a chain of middlemen. And there are hundreds 
of thousands of workers in unnecessary occupations. Each 
one of these middlemen and unnecessary workers demands 
a profit ; each is in business to make a living. Much more 
attention has been paid to the processes of primary pro- 
duction than to the process of marketing products. Es- 
pecially in the marketing of food products, slipshod methods 
have reigned supreme. Food scarcity in certain localities 
is frequently accompanied by a food surplus in other dis- 
tricts. In recent years, more and more attention is being 
devoted to advertising and the art of salesmanship, but the 
prime object in view is the sale of the commodity, not the 
reduction of the expenses of getting the product from 
the producer to the ultimate consumer. 

A study of the marketing of farm products made by the 
students of Harvard University in 1911 yielded results 
which are worthy of notice. Apples produced in Marlboro, 
Massachusetts, were sold by the producer for $2.25 per 
barrel ; the consumer in Boston paid $7.50 per barrel. The 
difference between these two sums was divided as follows : 
picking, $0.25 ; barrel, $0.25 ; commission, $0.25 ; sorting, 
$0.15; labeling, carting, etc., $0.10; storage, $0.50; whole- 

174 



MARKETING 175 

saler, $2.00; retailer, $1.50; freight, $0.25. Milk produced 
in Montgomery County, Pennsylvania, and sold for 3f 
cents per quart was retailed in Philadelphia for 8 cents. Of 
the difference, the retailer received 4 cents and the trans- 
portation company absorbed f of one cent for freight. An 
investigation of the citrus fruit industry in California re- 
vealed the fact that one-third of the consumer's dollar goes 
to the retailer of the fruit, eight per cent to the jobber, and 
over twenty per cent for transportation and refrigeration. 

These three, and a considerable number of other examples, 
show clearly that marketing costs of farm products amount 
to a large fraction of the total paid by the consumer. A 
newspaper account of the marketing of eggs in the vicinity 
of the city of Chicago in 1917 reveals a considerable string 
of middlemen, each, of course, insistent upon his profit. 
The eggs are usually sold by farmers to a collecting agent 
who drives about the country. The agent sells to a country 
shipper located in some town, who in turn sends the eggs 
to a large produce shipping company in the nearest city. 
The latter ships to a broker in Chicago, who may put them 
in cold storage. Later, the eggs are sold to a jobber; the 
jobber sells to the retailer, and the latter to the consumer. 
Six profits must be paid; breakage and decay, transpor- 
tation and cold storage also take toll. 

A food survey of Altoona, Pennsylvania, in 1915, showed 
that two-fifths of the food bill of that city of approximately 
60,000 inhabitants was spent for transportation and re- 
transportation, handling and rehandling, waste, jobbers' 
profits, and the like. Four-fifths of the city's perishable 
food came by rail, often long distances. As an inevitable 
consequence, the consumers were obliged to consume many 
" stale and therefore tasteless, unappetizing, and inedible 



176 ELEMENTARY ECONOMICS 

vegetables." This investigation also uncovered the fol- 
lowing episode in the history of marketing in Altoona. A 
farmer hauled a barrel of apples to the station and shipped 
it by rail to Altoona. There, the barrel was placed on a 
dray and taken to a commission merchant. The latter 
purchased and forwarded it to Pittsburgh, — again drayage 
and shipment. In Pittsburgh, the barrel was again hauled 
to the store of a commission merchant, sold, and taken to 
the station in Pittsburgh. The barrel was again placed in 
a freight car and carried back to Altoona, hauled to the 
store of another commission merchant, sold and hauled to a 
retailer. The latter opened the barrel and sold the apples 
to his customers. " Four sales, six cartings, three railway 
journeys, all on one barrel of apples, — not very good apples 
either." This has aptly been called the " mob " method of 
marketing. By means of a scientific organization of market- 
ing, much of Altoona' s perishable food could doubtless be 
produced near the city and placed in the hands of consumers 
with little waste and without unnecessary transportation. 
Altoona's problem is that of the typical American city. 

In 1911 it was estimated that there were 350,000 grocers 
in the United States; that is, about one grocer for every 
260 persons or one for every 52 families. An investigation 
of the delivery of milk in a section of Rochester, New York, 
made in 1917, disclosed some interesting facts. In a small 
neighborhood, 57 dealers delivered milk to 363 homes, 
traveling an aggregate of 30 miles. The service could have 
been rendered by one distributor traveling two miles. A 
similar method of delivery obtained in other sections of that 
city, — and in many other cities in the United States. In 
New York City (1917) there were approximately 47,500 
retail stores and markets, and one thousand small jobbers 



MARKETING 177 

selling to the stores and restaurants. Farther from the 
consumers are wholesale markets and commission mer- 
chants. And the latter buy of wholesalers who in turn buy 
of the producers and ship to New York City. Here is dis- 
closed a great and costly chain of middlemen whose business 
it is to provide foodstuffs for the five or six millions of people 
living in the great metropolis. Unnecessary marketing 
expense tends to increase the price paid by the consumer and 
to lower the price received by the primary producer. The 
fundamental problem is: Can the chain be shortened and 
the expense of marketing and transporting reduced ? 

War conditions forced the American people to give more 
careful consideration to the important matter of food pro- 
duction and distribution. The war directed the attention 
to all forms of waste ; it made " us all think food and talk 
food." As a consequence, more and more attention is being 
paid to marketing, and now with a view to reducing the 
expenses of marketing. It must not be forgotten, however, 
that the use of the telephone, advertising, the employment 
of the carton, and the greater emphasis upon cleanliness 
are all expenses which add to the total cost of marketing 
products ; and the tendency toward specialization, the growth 
of cities, and the consequent separation of the consumer and 
the producer, all make inevitable the development of a 
multitude of middlemen. 

The quite general use of the one-price system has also 
changed the mechanism of bargaining. The old, time- 
wasting methods of bluff and higgling are no longer used. 
The merchant fixes one price for all ; the would-be purchaser 
must pay that price or go without the article unless, of course, 
some competitor will sell at a lower price. The original 
package and the money-back-if-dissatisfied method of sell- 



178 ELEMENTARY ECONOMICS 

ing goods tend to improve business morals. The responsi- 
bility for an imperfect or adulterated product can be easily 
traced. Deceit, adulteration of goods, and other dishonest 
business methods must now be discarded or be very care- 
fully covered up; it is no longer profitable to be crudely 
dishonest. 

Proposals for Betterment. Among the schemes utilized 
to bring the consumer and the producer closer to each other 
by eliminating certain links in the usual long chain between 
them, are the parcel post, municipal markets, and coopera- 
tive sales agencies. Many commercial houses have used 
the parcel post successfully; but the farmers have not as 
yet made extensive use of the parcel post in marketing their 
produce. Public markets are important factors in market- 
ing farm produce in many eastern and some western cities. 
Cooperative methods have been successfully used in market- 
ing grain, fruit, vegetables, and live stock. Cooperative 
buying has also been employed successfully by farmers and 
others. " A long line of commission men, produce merchants, 
jobbers, hucksters, retailers, and what not simply passing 
goods from hand to hand like a bucket brigade at a fire, is 
not only inefficient and wasteful, but very costly. In these 
days a hydrant and a line of hose are wanted." Public 
markets, the parcel post, and cooperative marketing are 
attempts at furnishing the hydrant and hose. 

Advertising. Advertising draws attention to a new article 
and stimulates new wants, or it boosts the sale of one variety 
of article with a consequent reduction in the sales of another 
variety of the same article. Advertising is a marketing 
tool, and the expense of its use must ultimately be borne 
by the consumer or by the primary producer of the ad- 
vertised article. Advertising is primarily a guide to the 



MARKETING 179 

consumer ; but much of the advertising in the daily papers 
and the magazines is of the purely competitive type paid 
for by rival sellers of similar commodities. Consequently, 
a considerable percentage of commercial advertising is of 
the socially unnecessary and wasteful kind. Soon after the 
entrance of the United States into the war, the government 
began furnishing much information as to the desirability of 
certain goods, notably of food products. Such action on the 
part of public authorities reduces the social necessity for 
private advertising. 

In recent years the art of advertising has been highly 
developed. Skillful advertisers and salesmen look to the 
weaknesses, the vanity, and the prejudices of possible pur- 
chasers. Salesmanship is becoming an art; and universi- 
ties, colleges, night schools, and correspondence schools are 
offering courses of instruction in salesmanship. The con- 
sumers, in self-defense, need instruction in methods of re- 
sisting the skillfully prepared advertisement and the shrewd 
salesman. 

TOPICS FOR DISCUSSION 

1. How many grocery stores are there in your city ? How many 
families per store ? 

2. How many meat markets? How many families per meat 
market ? 

3. How are groceries delivered in your city ? 

4. Is there a public market? If so, is it well located? Do 
many families purchase at the market? 

5. Is there a cooperative store? 



CHAPTER XXI 
PUBLIC EXPENDITURES AND PUBLIC DEBTS 

The Functions of Government. The government of a 
nation, Hke all other social institutions, changes as the years 
go by. The functions of the American government have 
changed as constitutions and laws have been modified, as 
judges have handed down new decisions as to the significance 
of existing laws and constitutions, and as new administrative 
methods come into vogue. A war inevitably brings with it 
marked changes in the governments of the nations involved. 
During the Middle Ages and until the latter part of the 
eighteenth century, the English government endeavored 
to restrain business activities; it granted monopoly privi- 
leges, attempted to fix wages and prices, and tried to deter- 
mine the quality of goods bought and sold on the market. 
The American colonists resented the interference of the 
English government in colonial business affairs. Then 
followed an epoch in which the pendulum swung to the other 
extreme; and a very different theory of government was 
accepted. The function of government was conceived to 
be restricted to very narrow limits. The government was 
organized merely to protect persons and property from 
foreign enemies or internal disorders ; it should not control 
or regulate in any way ordinary business affairs. 

The American government was founded and our federal 
Constitution formulated when the non-interference theory 
of governmental functions was generally accepted by Eng- 
lish-speaking people. It became the underlying principle 
of our constitutional and legal system. This theory caused 

180 



PUBLIC EXPENDITURES AND PUBLIC DEBTS 181 

no considerable degree of injustice so long as industries 
were small-scale, and the United States was still a nation 
of pioneers. But as business became large-scale and econcmic 
class demarcations became clearer, some governmental regu- 
lations to curb special privilege and monopoly were urgently 
demanded. In recent decades, the functions of government 
have been rapidly increasing ; and as a consequence the expend- 
itures of government have risen to higher and higher levels. 
Expenditures of Different Governmental Units. In this 
country, several different branches of government are 
authorized to spend money. The federal, state, municipal, 
and other local and school district authorities may provide 
for expenditures. In 1911, the expenditures of the federal 
government were somewhat more than $10 per capita; in 
the same year the State of Minnesota expended for state 
purposes nearly $8 per capita. In 1910, the per capita ex- 
penditures of the State of New York were also nearly $8 ; 
but the City of New York expended almost $33 for each 
man, woman, and child living in the city. The amount 
expended per capita by our states and cities varies greatly ; 
it has been estimated that before the opening of the Great 
War in 1914, from $150 to $175 were expended by the 
various governmental units for each and every family re- 
siding in the United States. This amount was a consider- 
able fraction of the average family income, — perhaps one- 
tenth to one-eighth. According to estimates made by 
Professor King of the University of Wisconsin, the per capita 
cost of government in the United States was multiplied 
nearly seven times in the sixty years from 1850 to 1910. 
During the same time the average income of each individual 
was only quadrupled. The expenditures for governmental 
purposes are increasing much faster than the average income 



182 ELEMENTARY ECONOMICS 

of the American citizen ; a larger and larger portion of our 
total income is expended by the government and a decreasing 
fraction by individuals. 

The expenditures of American cities have been increasing 
with great, almost alarming, rapidity. The reason is not 
difficult to ascertain. The paving of streets, increased fire 
and police protection, better schools, measures for protection 
against disease, recreation facilities, and a multitude of 
other items go to swell the total. For the last decade and 
a half the expenditures of the state governments, which 
had not been growing rapidly before that time, have also 
been increasing at a rapid pace. State aid in building good 
roads, the extension of government by commissions and 
boards, the increasing aid to education, and larger expendi- 
tures for charitable and penal institutions and institutions 
for defectives, are in no small degree responsible for the in- 
crease in state expenditures. The expenditures of the 
federal government have also increased with rapid strides, 
la 1913, the federal government spent about one billion 
dollars ; this sum is more than the estimated expenditures of 
all governmental units — national, state, local, and school — 
in 1890. With the opening of the war in 1914 and the speed- 
ing up of our preparations for war, the expenditures of the 
federal government became still larger. The federal ex- 
penditures for the first fiscal year after the entrance of the 
United States into the struggle (July 1, 1917, to June 30, 
1918), amounted to over twelve billions of dollars, of which 
approximately four and three-fourths billions were loaned 
to the Allies. The actual expenditures of our federal gov- 
ernment were, therefore, approximately seven and one-half 
billions of dollars. From January 31 to May 15, 1918, the 
average daily expenditures were about $39,000,000. 



PUBLIC EXPENDITURES AND PUBLIC DEBTS 183 

The average daily expenditure of the British Government 
for the last fiscal year preceding the opening of the war with 
Germany was two and three-fourths millions of dollars; 
before the second year of the war was over, the daily average 
expenditure was twenty-five millions of dollars. And 
later the daily expenditures reached much higher levels. 

Analysis of Expenditures. It is interesting and instructive 
to examine the larger items of expenditure of a city, a state, 
and the federal government. New York, the largest Ameri- 
can city, spends nearly two hundred millions of dollars 
annually. In 1913, the appropriations made were in round 
numbers $190,400,000; the actual expenditures may have 
differed slightly from this total. In the table following, 
the total appropriations are divided into ten divisions ; and 
the percentage of the whole assigned to each division is 
given. 

Per Cent 

Administration and Legislation 1.92 

Education 19.80 

Protection of Life and Property 16.37 

Streets, Bridges, Docks, and Ferries 4.35 

Recreation, Science, and Art .- . 1 .86 

Debt Service (Redemption and Interest) 28.87 

Judicial Service 4.65 

Health and Sanitation 9.44 

Correctional and Charitable Purposes 5.27 

Miscellaneous (Rents, Elections, Public Buildings, Print- 
ing, Pensions) 7.47 

An analysis by an accountant, Harvey S. Chase, of the 
" estimates '' of the expenditures of the federal government 
for the fiscal year ending June 30, 1915, is perhaps the best 
for our present purpose. Mr. Chase divides the expendi- 
tures into five classes : (1) War Functions, — army, navy, 
interest on war debts, war pensions, etc. ; (2) Peace Func- 



184 ELEMENTARY ECONOMICS 

tions, — the promotion of agriculture, public health, and 
education, the regulation of the currency and banking, 
administrative costs of the Departments of State, Interior, 
Agriculture, Commerce, and Labor, care of Indians, and a 
large group of other items ; (3) Postal Service ; (4) General 
Governmental Functions, — legislative, executive, judicial, 
etc. ; (5) Local Governmental Functions, — territorial gov- 
ernments, Philippine Islands, District of Columbia, etc. 
The percentage of the total expenditures assigned to each of 
these five groups is approximately as follows : — 

Per Cent 

War Functions 44.2 

Peace Functions 18.1 

Postal Service 29.5 

General Governmental Functions ...... 6.7 

Local Governmental Functions 1.5 

100.00 

Preparedness and actual participation in war have greatly 
enlarged the fraction assigned to war functions, and, of 
course, greatly increased the total. 

The Minnesota Tax Commission made a careful analysis 
of the expenditures of that state for the year 1911. The 
table on the following page presents the results of that 
analysis. Good roads may in the future be expected to 
absorb an appreciable percentage of the total expenditures 
of our states. 

Since our governmental expenditures are so large and 
absorb a considerable fraction of the total income of the 
men and women of the nation, it is highly important that 
waste, inefficiency, and graft be reduced to a minimum. 
Each and every citizen is vitally interested in the matter 
of efficient governmental service. The tax gatherers reach 
down into each and every pocketbook. 



PUBLIC EXPENDITURES AND PUBLIC DEBTS 185 

Per Cent 

Administration (all departments) 13.47 

Courts 2.44 

Legislature 2.81 

Education 47.29 

Care of the Insane 9.31 

Correctional Institutions 6.06 

Other State Institutions 1.77 

Militia 1.03 

Debt and Interest 9.14 

Miscellaneous 6.68 

100.00 

Public Debts. Public debts are incurred chiefly because 
of extraordinar}^ expenditures on account of war, or for the 
building of public works, such as canals, municipal plants, 
improved roads, and public buildings. From time to time, 
small debts are incurred to make up deficits in the public 
revenues. In the United States, the national debt is very 
largely the result of war expenditures; but the state and 
local debts are due mainly to expenditures for public works. 
In recent years the debts of the local governmental units, 
particularly of municipalities, have increased very rapidly. 
In 1870 the total debt of our local governmental units was 
$516,000,000; in 1902, $1,630,000,000; and in 1913, 
$3,476,000,000. The per capita debt of these minor di- 
visions increased from $20.74 in 1902 to $38.81 in 1913. 
The debt of New York City in 1912 was as large as our 
national debt at that time. The debts of the states are 
comparatively small, but have been increasing since 1890. 

The debt of the federal government was large after the 
close of the Civil War. In 1870, it totaled $2,331,000,000 ; 
but by 1890 it was reduced to $852,000,000. The Spanish- 
American War, the increase in our navy, and the building of 
the Panama Canal, caused a comparatively slight increase. 



186 ELEMENTARY ECONOMICS 

This increase was, however, less than the increase in popu- 
lation. The national debt per capita was $60.46 in 1870 
and $10.59 in 1913. 

The opening of the Great War in 1914 has caused enormous 
increases in the national debt of all belligerent countries. 
In the first year and a half of war, England's debt rose from 
approximately $3,500,000,000 to $11,155,000,000. By the 
end of 1916, it was estimated that the national debt of the 
five chief belligerents had been increased by $49,455,000,000. 
The national debt of all the countries of the world was 
estimated to be only $36,548,000,000 in 1908. The debt 
of the federal government of the United States in 1913 was 
approximately one billion of dollars; but the total amount 
borrowed during the first fiscal year of war was about eight 
billions of dollars, of which a little more than one-half was 
loaned to the Allies. 

TOPICS FOR DISCUSSION 

1. Get a statement of the expenditures and receipts of your 
town, county, and state. Compare them with the figures given in 
this chapter. 

2. What is the amount of the debt owed by your city? Your 
county ? Your state ? 

3. What was the amount of the expenditures of the federal 
government for the last fiscal year? 

4. What is the amount of the debt of the federal government? 



CHAPTER XXII 
TAXATION 

Governmental Income. Having considered the expendi- 
tures of our government, it is now necessary to study the other 
side of the problem, — that of the income of the different 
governmental units. An individual attempts to square 
his expenditures with his income; but, as a rule, public 
officials decide first upon the expenditures to be allowed 
in a given year and then proceed to put into effect such tax 
measures as will yield the required amount. It should 
also be noted that, except as the government carries on 
business enterprises, the income of the public treasury is a 
secondary or derivative income; the public purse is re- 
plenished by taking a portion of the income of the nation's 
citizens. There is no " magic fund " out of which a gov- 
ernment may pay its running expenses. 

The Budget System. In England, the Chancellor of the 
Exchequer presents annually to Parliament the estimates 
of the needs of the diiferent departments of the govern- 
ment. He also presents a statement of the changes which 
should be made in the taxing system to meet the expendi- 
tures provided for in the estimates. This statement of 
estimated expenditure and receipts is called the budget. 
In our federal government, no budget system worthy of 
the name has as yet been developed. Estimates of neces- 
sary expenditures made by the different departments of 
government are presented to Congress by the Secretary of 
the Treasury. Some of the estimates are referred to one 

187 



188 ELEMENTARY ECONOMICS 

committee and certain ones go to other committees. These 
committees working independently report in due time to 
the House. The matter of taxation is taken up by another 
committee, the Ways and Means Committee; and this 
also reports to the House. A similar process is followed in 
the Senate. There is little systematic and scientific study 
of the budget. As a consequence, the expenditures of the 
federal government may one year be greater than the 
revenues, and another year be much less. The lack of unified 
consideration of income and outgo is not, however, wholly 
to blame for the situation. Our tariff duties, which in the 
past have been the source of about one half of the federal 
revenue, have been determined primarily for the purpose 
of protecting American industries. Revenue has been an 
incidental matter. This policy has greatly increased the 
difficulties of forecasting the probable financial fruitfulness 
of a tariff measure. 

In the majority of the state legislatures appropriations 
are handled in much the same manner as in Congress. In 
our cities, the budget making is carried on in a more sys- 
tematic manner. The mayor is made responsible in some 
cities for the presentation of the budget. In New York 
City, it is made by a board of estimates and apportionment 
of which the Mayor is a member. In cities under the city- 
manager plan of government it is the duty of the manager 
to present the budget. 

Definition. The major portion of the income of our local, 
state, and federal governments is derived from taxation. 
A tax may be defined as a compulsory contribution levied 
by the government to be used for public purposes or for 
common benefits. Some other less important sources of 
governmental income are special assessments, fees, fines, 



TAXATION 189 

sale of public land, operation of public industries, loans, 
and gifts. 

Tariffs. Our federal government derives its income 
chiefly from three taxes : customs or tariff duties, internal 
revenue taxes or excises, and income taxes. A tariff duty 
is levied upon goods imported into this country from some 
foreign country. The duty is paid to governmental officials 
at the port of entry. Many of American tariff duties are 
protective; the duties are levied upon the importation of 
certain kinds of goods which are produced here as well as 
imported. Protective duties reduce the amount of the 
protected article imported, and give American manufacturers 
a better opportunity to produce the article protected in 
competition with foreign manufacturers A tariff for 
revenue only would be levied only upon articles not pro- 
duced in this country. Tea is not produced in the United 
States; and a tariff duty placed upon tea would not be 
protective. On the other hand, a tariff on steel rails would 
be protective. 

A tariff duty tends to raise the price of the article taxed. 
Consequently, with some exceptions, the consumer pays a 
part or all of the duty by paying the higher price. In case 
of a protected article, the consumer as a rule not only pays 
more for the imported article, but a higher price may be 
exacted for the portion of the supply produced in this 
country. In other words, protected manufacturers are 
able to raise the prices of their products because the tariff 
makes foreign competition somewhat difficult. Competi- 
tion between American manufacturers may, however, force 
a reduction in price, — unless a trust or combination is 
formed. A very high protective tariff will tend to stop the 
importation of the article protected and to stimulate home 



190 ELEMENTARY ECONOMICS 

manufacture of the article. Little revenue will, therefore, 
be obtained. A tariff for revenue only may yield large 
returns. 

Many arguments are advanced in favor of and against 
the use of a protective tariff system. These cannot be con- 
sidered in detail in an elementary textbook on economics. 
It may be pointed out, however, that protective tariffs tend 
to diversify industries within a nation; and in time of war 
or danger of war it is highly essential that a nation be pre- 
pared to produce a large portion of its war supplies. The 
student should also notice that a protective tariff may 
lower the productive efficiency of a nation by obliging the 
workers of that nation to produce articles which can more 
easily be produced elsewhere. If, for example, the United 
States has excellent opportunities to produce iron and steel 
products and possesses fewer advantages in the production 
of sugar, it would be desirable from an economic point 
of view, political, war, and private considerations aside, 
to exchange iron and steel products of home manufac- 
ture for sugar produced abroad. The people of the United 
States, and of the other nation as well, might have more of 
both articles than they would have if a protective tariff on 
sugar made importation of sugar difficult, and caused certain 
American workingmen to be used in producing sugar in- 
stead of iron and steel products. 

Internal Revenue. An internal revenue tax or excise 
is a tax levied upon the production of certain articles or upon 
the performance of certain functions. For over a half 
century the United States has levied an internal revenue 
tax upon the manufacture and sale of liquors and tobacco. 
In 1916 and 1917 new internal revenue taxes were also levied 
upon many other articles and services. The internal revenue 



TAXATION 191 

tax is sometimes used to stop the production of certain 
products rather than to provide income for the government. 
A few years ago, Congress placed an excise duty upon the 
production of matches tipped with phosphorus. This tax 
was sufficiently high to prevent further manufacture of 
this kind of match. It was cheaper to produce matches 
tipped with other and non-poisonous material than to make 
the phosphorus match and pay the tax. Congress took 
this action because the manufacture of matches tipped with 
phosphorus often caused a very loathsome and dangerous 
disease among the workers in the match factories. The 
tariff can be used to stimulate certain kinds of manufacture ; 
and the internal revenue tax can be utilized to stamp out 
obnoxious or undesirable methods of manufacture. 

The Federal Income Tax. The income tax now levied 
by the federal government is a complex graduated or pro- 
gressive tax. The rate is higher when the levy is made 
upon large incomes than when it falls upon small incomes. 
In 1918 two income tax laws were in force, — the ordinary 
tax passed in 1916 and the war tax imposed in 1917.^ Both 
laws provide for progressive rates and for the exemption 
of small incomes. The head of a family pays under the 
war tax a two per cent tax on the excess in his income over 
$2000 (plus $200 for each dependent child) ; under the 
ordinary tax, he pays two per cent on the excess over $4000. 
These are called the normal tax rates. In the case of other 
persons, the exemptions are $1000 and $3000 respectively. 
Additional taxes or sur-taxes are levied on incomes above 
$5000. For example, upon an income between $5000 and 
$7500 a sur-tax of one per cent is levied on the amount above 
$5000 ; on incomes between $40,000 and $60,000 a sur-tax 

1 Modified somewhat in 1919. 



192 ELEMENTARY ECONOMICS 

of twelve per cent is levied; and on incomes in excess of 
$2,000,000 a sur-tax of sixty-three per cent is levied on the 
amount in excess of $2,000,000. An income of $2,200,000 
would pay the normal taxes on the entire amount minus the 
exemptions and a number of sur-taxes ranging from one 
per cent on $2500 to sixty-three per cent on $200,000. 
Corporations pay a tax of six per cent upon their net income ; 
and dividends received by individual stockholders are not 
subject to the normal tax under the income tax laws out- 
lined above. The income tax is theoretically a good tax 
and the system will probably be retained as a permanent 
part of the federal taxing machinery. 

In addition to tariff duties, internal revenue duties, and 
income taxes, the federal government levies an excess 
profits tax and an inheritance tax known as the federal 
estates tax. The excess profits tax is imposed upon profits 
in excess of those received during the period immediately 
preceding the war or in excess of what is considered to be a 
reasonable rate of profits. Corporations, partnerships, and 
individuals are subject to the tax. It is an attempt to turn 
war profits into the federal treasury. The federal estates 
tax is levied upon the transfer of estates at the death of the 
owners. This tax is in addition to any inheritance tax 
which may be levied by a state government. 

State and Local Taxation. The various state govern- 
ments derive nearly all of their income from inheritance 
taxes, corporation taxes, license taxes, and the general 
property tax. No two states have exactly the same system. 
The cities, townships, counties, and other forms of local 
government utilize chiefly the general property tax. Many 
improvements in cities are paid for by special assessments. 

The inheritance tax is used by about three-fourths of the 



TAXATION 193 

American states; but except in a few of the states, the 
amount received from this tax is smalL The usual form of 
the state inheritance tax provides for lower rates and higher 
exemptions for direct than for collateral heirs, and the rates 
are progressive, that is, the larger the inheritance, the 
higher the rate of taxation. The federal estates tax is 
levied upon the estate ; the state inheritance taxes are levied 
upon the inheritance. A state tax would be less if the estate 
were divided among ten heirs than in case it was inherited 
by one heir. The inheritance tax is a good tax ; it is easily 
collected, is difficult of evasion, and does not impose a heavy 
burden upon the taxpayer. 

The Corporation and License Taxes. The corporation 
tax takes many forms. It is levied only upon businesses 
organized as corporations. A license tax is a payment re- 
quired for the privilege of carrying on a certain kind of 
business or for doing a particular act. Many states required 
a saloon keeper to take out a license. The Southern states 
use the license system extensively; and many businesses 
are required to pay a license tax. Automobile owners are 
required in all states to pay a license tax each year. A 
license tax is often levied not only for the purpose of raising 
revenue but also for the purpose of regulation. Regulation 
is usually the chief motive in obliging the automobile owner 
to take out a license. 

The General Property Tax and Special Assessments. 
The general property tax is the chief source of revenue of 
our townships, municipalities, and counties. It is also used 
by many of our states. This tax may be divided Into two 
parts : a tax on real estate and a tax on personal property. 
The real estate tax is levied on land and the improvements 
thereon according to their value as determined by assessors. 
o 



194 ELEMENTARY ECONOMICS 

The personal property tax is levied upon miscellaneous forms 
of property, such as household furniture, live stock, tools 
and implements, stocks, bonds, mortgages, and the like. 
The personal property tax is not and probably cannot be 
fairly assessed and collected. Stocks, bonds, and mortgages 
can easily be concealed. This tax is condemned by many 
authorities on taxation. It should be discontinued. 

Certain tax reformers also advocate reducing the tax on 
improvements below that assessed on land of equal value. 
Such a step, it is urged, would stimulate building. Under the 
present general property tax laws, after a man builds a new 
house or other building the taxing officials immediately 
begin to penalize him for improving his premises. Certain 
Canadian cities exempt improvements from taxation ; and 
Pittsburgh and Scranton, Pennsylvania, tax improvements 
at a lower rate than land. A few states also levy an income 
tax. 

A special assessment is used by cities to defray the cost 
of some public improvement such as a pavement. It is 
levied once for all ; it does not recur year after year, as 
does a tax. The special assessment is levied upon the 
property on both sides of the street, which is benefited by 
the laying of the pavement. 

Justice in Taxation. Many theories of taxation have been 
advanced ; but the most commonly accepted are the benefit 
and the ability-to-pay theories. According to the benefit 
theory, justice in taxation is attained when taxes are ap- 
portioned according to benefits received from governmental 
activities. Special assessments are levied in harmony with 
the benefit theory. That taxes should be paid in proportion 
to the ability of the taxpayer to pay is the theory quite 
generally accepted by the American people. But what 



TAXATION 195 

measures the ability to pay? Is it measured by property, 
by income, or by some other criterion ? If it be measured 
by property or income, does the abihty increase as rapidly 
or more or less rapidly than the increase in property or 
income ? Should the rate be the same on an income of $1000 
per year as on one of $500,000 per year? Or, should the 
rate be progressive? To answer that the rate should be 
progressive seems logical and fair; but complications arise 
when an attempt is made to determine what the exact in- 
crease in the rate should be. Our income and inheritance 
taxes are almost invariably progressive; but the general 
property tax is not. The tariff and internal revenue duties 
are as a rule the reverse of progressive; these taxes fall in 
proportion to income more heavily upon the poor than the 
well-to-do. Tariff and internal revenue duties are re- 
gressive; and are theoretically unjust forms of taxation. 
But both are easily and cheaply collected and the taxpayer 
does not '' feel " the tax as he would one paid in a lump sum 
once a year to a tax collector. 

TOPICS FOR DISCUSSION 

1. How does your town or city raise its revenues? What is 
the city tax rate ? 

2. How does your county raise its revenues? What is the 
county tax rate ? 

3. How does your school district raise its revenues? What is 
the school tax rate? 

4. How much is the state automobile license tax ? 

5. Do you favor removing the general property tax from im- 
provements in cities ? Why ? 



CHAPTER XXIII 
INDUSTRIAL UNREST 

Contentment has been pictured as a mild form of decay or 
degeneracy. Progress and advancement are likely to go 
out of the door when one becomes entirely contented with 
his lot in life. A desire to better one's condition and posi- 
tion is commendable. Nevertheless, dissatisfaction may be 
carried so far as to bring about undesirable and dangerous 
conditions of unrest. It is well when the working people 
of this country are eager to improve their living and working 
conditions; but it is not well when they become extremely 
dissatisfied and discontented. When industrial unrest be- 
comes extreme, the wise economists and statesmen will waste 
little energy in denouncing the wage earners; they will 
diligently seek for the underlying causes. Not until these 
are disclosed can the difficulties be cleared away. Industrial 
unrest manifests itself in strikes, lockouts, boycotts, agita- 
tion, sabotage, and inefficient work. In 1912, industrial 
unrest in this country was deemed by Congress to be so evi- 
dent that a Commission on Industrial Relations was ap- 
pointed to investigate labor conditions and make a report. 
This Commission was composed of nine persons, — three 
representing the employers; three, the employees; and 
three, the general public. The Commission made a careful 
study of the situation. It held hearings before which dif- 
ferent types of persons were called ; and it employed a corps 
of competent investigators. Its final Report was made in 
1915. 

196 



INDUSTRIAL UNREST 197 

Causes of Industrial Unrest. While the Commission, as 
might have been expected, did not entirely agree as to the 
causes of unrest, four causes were emphasized : the unjust 
distribution of wealth and income; unemployment and the 
denial of an opportunity to earn a living ; the denial of justice 
in the creation, the adjudication and the administration of 
the law; and the denial of the right to form effective labor 
organizations. These four causes of unrest are so funda- 
mental that a brief consideration of each may help the stu- 
dent to understand our important and pressing labor 
problems. 

Distribution of Wealth. The great inequality in the dis- 
tribution of wealth in this country is undoubtedly one of 
the basic causes of industrial unrest. The wageworkers 
are convinced that the pecuniary rewards for human effort 
are very unfairly apportioned.^ Too many, declare the 
spokesmen of organized labor, work hard, regularly and in- 
telligently for a wage which will scarcely enable them to sup- 
port a family ; others do not work and yet receive fabulous 
incomes. Such a situation, in a democratic country favored 
with free public schools and manhood suffrage, is quite 
certain to result in vigorous protests and in the initiation of 
reform or revolutionary movements. 

Unemployment. Even in the most prosperous times, a 
considerable percentage of men and women who desire to 
work and who are able to do so, are unable to obtain work. 
In hard times, in a time of crisis, the number of the un- 
employed becomes distressingly large ; bread lines and soup 
kitchens become common in the large cities. The regular 
seasonal fluctuations in demand for workers is not small. 
Employers hire and discharge without giving much con- 

1 See Chapter VII. 



198 ELEMENTARY ECONOMICS 

sideration to the plight of the discharged worker. Only 
in recent years are employers beginning to realize that a 
large labor " turn-over " is expensive. It costs perhaps 
$30 to $100 to break in a new man; and our migratory 
labor problem is in part a consequence of the thoughtless 
and short-sighted policies of employers in the treatment 
of their labor force. 

The business of buying and selling labor power has been 
carried out in a fashion which is antiquated in the busi- 
ness of buying and selling almost any important com- 
modity, — shoes, cloth, or grain, for example. The pack- 
peddler method of tramping from shop to shop looking for 
a job is still used in many places. '^ Boy wanted " signs 
are often seen; but no one would think of putting out a 
"pair of shoes wanted " sign. Shoes are sold in well-estab- 
lished shoe markets, in shoe stores. Public employment 
bureaus — labor stores — are beginning to offer fairly 
adequate market facilities for certain forms of labor; and 
large employers of labor are developing employment de- 
partments which deal intelligently with the problem of hir- 
ing men. The arbitrary and frequent discharge of workers 
is also being discredited. 

The primitive man or the pioneer farmer did not face the 
danger of unemployment. The pioneer was not obliged 
to seek an employer in order to get permission to work and 
to earn a living for himself and family. But the great mass 
of workers to-day cannot get access to an opportunity to 
earn a living except by finding an employer. Free land has 
disappeared; the worker must work for wages and for an 
employer. Deny him this opportunity and he is denied 
the right to earn a living. Involuntary unemployment under 
modern conditions is a potent and inevitable cause of unrest. 



INDUSTRIAL UNREST 199 

The Denial of Justice. The testimony taken before the 
Commission clearly indicated that the workingmen of the 
nation possess a deep-seated conviction that they are not 
given fair treatment in regard to the passage of laws beneficial 
to them as a class or in the interpretation and administration 
of such laws after passage. The investigations of the Com- 
mission also disclosed the fact that the laboring men were not 
without plausible reasons for such an attitude. The history 
of labor legislation points clearly to the conclusion that it is 
less difficult to obtain the passage of laws protecting property 
than laws protecting human life and preventing overwork. 
The long history of child-labor legislation discloses a multi- 
tude of obstacles in the way of passing adequate child labor 
laws ; it offers eloquent testimony as to the accuracy of this 
conclusion. 

In the second place, the working class of the nation is also 
convinced that the judges of our courts are more closely in 
touch and in sympathy with the employers and the capital- 
ists than with the employees. It is charged that after labor 
laws are passed the courts too often either nullify them be- 
cause of technicalities which would not be raised in regard to 
legislation favorable to the business interests of the nation, 
or declare them unconstitutional because of reactionary 
interpretations of the federal Constitution. The situation 
has led many working people to distrust the government and 
especially the courts of the nation. It is one of the most 
important causes of industrial unrest in the United States. 

Denial of the Right to Join Labor Organizations. Large 
corporations are great combinations of capital. A labor 
organization is a corresponding combination of wageworkers. 
The working people insist that united or collective action 
on their part is necessary in order to secure fair wages and 



200 ELEMENTARY ECONOMICS 

fair treatment from organized capital. But many large 
business firms have firmly and persistently used their in- 
fluence to destroy organizations among their employees or to 
prevent movements having for their motive the organization 
of the company's employees. Such employers refuse to 
deal with their employees collectively, that is, through 
union representatives, and insist that bargains be made only 
with individual workingmen. The workers believe that 
such treatment is unfair and inimical to their best interests ; 
and it is doubtless true that organization is an essential 
weapon in the hands of workingmen struggling upward 
toward better working and living conditions. 

There are many other causes of industrial unrest in this 
country; but the four which have been briefly considered 
are certainly among the most important. As long as great 
inequalities in wealth and income exist, so long will un- 
employment and irregularity of employment persist, so 
long will the workers feel that they are unfairly treated in 
regard to the passage, administration, and adjudication of 
laws, so long will hostile employers and employers' associa- 
tions continue to deny their employees the right to join 
labor organizations, and so long will the nation be harassed 
by strikes, boycotts, and other tokens of industrial un- 
rest. The most dangerous forms of industrial unrest may 
be found among the migratory and homeless workers of 
the West. These men live an abnormal life ; and they 
miss the incentives furnished by the home and by other 
permanent relationships of various kinds which make for 
good citizenship and contentment. 

The members of labor organizations are, Uke other men, 
selfish; and they are as a rule shortsighted individuals. 
The great majority of these workers are interested in im- 



INDUSTRIAL UNREST 201 

mediate benefits rather than in bigger plans of social better- 
ment which cannot, of necessity, be realized in the near 
future. As soon as wage workers get an increase in wages 
or a shorter working day, plans are laid for further increases 
in wages and for a still shorter working day. ^' The beautiful 
doctrine of more " is often preached by labor leaders. 



CHAPTER XXIV 
SOCIAL AND INDUSTRIAL BETTERMENT 

Plans for Betterment. For ages men and women have 
dreamed of human betterment ; many have been the builders 
of Utopias. In recent decades, a variety of schemes for 
improving Hving and working conditions and for ehminating 
poverty and distress, ranging from the conservative to the 
extremely radical, have been presented. Of these only the 
most prominent will be herein outlined. The organized 
wageworkers hope to improve conditions for the workers 
through union action in the industrial and political field. 
In recent years, certain wide-awake employers have reached 
the conclusion that the efficiency of their business activities 
depends in a large degree upon the living and working con- 
ditions surrounding their employees. Consequently, em- 
ployers are improving the sanitary conditions, lighting, and 
ventilation in their stores and factories and providing ex- 
cellent toilet facilities and opportunities for rest and recre- 
tion. This is commonly called welfare work. The re- 
mainder of this chapter will be devoted to a brief consider- 
ation of certain other programs of social and industrial 
betterment. 

The Single Tax. The single-tax advocates propose to 
eliminate poverty by the adoption of one measure. The 
orthodox single-taxer demands that the government take 
as revenue all of the rent of land, and that no other form 
of tax be levied. Under the single tax none of the forms of 
taxation discussed in the chapter on taxation would be 

202 



SOCIAL AND INDUSTRIAL BETTERMENT 203 

utilized except that part of the general property tax which is 
levied on land, not on improvements or personal property. 
The income of all forms of government, federal, state, and 
local, would be an amount equal to the rent of land. The 
selling value of land, not including improvements, would fall 
to zero ; the improvements would have value and be bought 
and sold much the same as at the present time. But land- 
owners could no longer afford to hold desirable land out of 
use for the purposes of land speculation. According to the 
theory of the single tax, monopoly profits and all great in- 
equalities in wealth and income arise out of the private 
receipt of land rents. If all men were placed on an equality 
in regard to access to land, if every one who uses land were 
obliged to pay the entire rental return from that land as a 
tax, then, according to the advocates of this reform measure, 
each person would be treated fairly and great inequalities 
in opportunity would vanish. The single-taxer desires to 
continue competition, not to destroy it. Henry George was 
the great American advocate of the single tax. 

An increasing number of persons, including hard-headed 
business men, are willing to go some distance in the direction 
of the single-tax goal. This group is in favor of the re- 
duction of taxation on improvements and personal property, 
and of a corresponding increase in the tax on land. Land 
rent is a kind of overhead charge which all businesses are 
obliged to pay to landowners. An increase in the tax on 
land would not increase land rent. If it led to a reduction 
in the tax on capital and industry, such reduction would be 
a gain for the enterpriser and would correspondingly lower 
the expenses of carrying on a business. 

Socialism. The socialists maintain that the private 
receipt of rent, interest, and profits constitutes an injustice 



204 ELEMENTARY ECONOMICS 

to the great mass of unprivileged workers. The present 
industrial order, called by socialists the capitalist system, 
enables a comparatively few individuals to exploit the 
many. Under socialism, all large-scale industries and all 
monopolies are to be owned and operated by the govern- 
ment. Socialists point out that competition is wasteful, 
and that governmental operation would eliminate com- 
petition. These enthusiasts for radical social reform de-- 
clare that competition leads to combination and large-scale 
industry, and that when an industry becomes large-scale it 
is ripe for social control and operation. According to the 
socialists, society will presently outgrow private capitalism 
as it has slavery and serfdom. Nevertheless, under social- 
ism it is assumed that private ownership of many forms of 
wealth and of small businesses would be continued. The 
socialists hold high a fine ideal of economic justice and of 
equality of opportunity ; and they insist upon a democratic 
form of government. 

National Guilds. The national guild movement has 
gained considerable prominence in England. The national 
guildsmen favor governmental ownership of industry, but 
wish to place the control of a particular industry in the hands 
of the workers — unskilled, skilled, and administrative — 
in that industry. The workers would practically become 
partners in a business controlled by the government. It 
differs from socialism in that the management of industry 
would be decentralized. The workers, not their official 
governmental representatives, would direct the management 
of an industry. Under the national guild system, our post- 
office would be managed by the post-office employees. The 
relations between different industries would be determined 
by some representative body like our Congress. In Eng- 



SOCIAL AND INDUSTRIAL BETTERMENT 205 

land under war conditions, the government took control 
of certain industries and virtually made employers agents 
operating the business for definite returns. Producing for 
profits was actually supplanted by producing for use. This 
is not a national guild system, but it bears some of the 
marks of that plan. 

Anarchism and Syndicalism. The anarchist wishes to 
put an end to all coercive governmental power; he would 
eliminate organized government. The syndicalist likewise 
repudiates the political state. He would place the control 
of industry in the hands of the workers in each industry; 
but, unlike the national guildsmen, would make no provision 
for national control over the various industries and for their 
proper coordination. The Industrial Workers of the World 
in the United States represent one form of syndicalism. 
The syndicalist would overthrow the present industrial order 
by strikes, sabotage, or, if necessary, by more violent means. 
The syndicalists are not in favor of making agreements 
with employers, and they are opposed to such labor organiza- 
tions as those included in the American Federation of 
Labor. 

The Program of the Sociologists. The social workers and 
the sociologists are convinced that no one single-track plan 
will bring about a Utopia among men, and that no great and 
sweeping changes in human institutions come suddenly 
and without preparation. Social and industrial betterment 
are believed to be the results of evolution rather than of 
revolution. They are of the opinion that as there is law and 
order in the realm of physics and chemistry, so cause and 
effect may be studied in the political and social life of human 
beings. Sociology attempts to develop the science and art 
of human betterment ; it is concerned with human relation- 



206 ELEMENTARY ECONOMICS 

ships. A systematic program for industrial and social better- 
ment would include plans (a) to eliminate great inequalities 
of wealth and to usher in an approximation to equality of 
opportunity ; (b) to reduce the waste of human life through 
sickness, premature death, and accident ; (c) to increase the 
national and world output of desirable commodities and 
services ; (d) to improve educational facilities ; (e) to pro- 
vide for wholesome recreation and increased leisure. These 
plans, it will be noted, are somewhat interrelated and inter- 
dependent. 

The sociologist insists that the startling contrast between 
the prodigious income of certain privileged classes, received 
because of monopoly or speculative gains, and the hopeless 
and grinding poverty of the masses, must become a matter 
of history before definite and certain progress toward a high 
level of human achievement and happiness may be an- 
ticipated. Approximate equality of opportunity, it is con- 
fidently believed, is essential to progress in a democratic 
nation. With these ends in view, it is proposed (1) to reduce 
the size of incomes received from speculation and monopoly 
power. This may be accomplished by stringent regulation 
of trusts and monopolies. (2) The second part of the pro- 
gram is to use the taxing power to take considerable portions 
of large incomes for governmental purposes. The plan 
provides for highly progressive income and inheritance taxes, 
and for the taxation of excess profits ; for an increase in the 
taxation of land rents and of monopoly and speculative 
gains. Or, in essence, it is proposed to tax lightly incomes 
which are " earned," and to tax heavily incomes which may 
be called " unearned " or '' findings." Of course, much 
difficulty may be confronted in reaching a generally satis- 
factory definition of '' earned." 



SOCIAL AND INDUSTRIAL BETTERMENT 207 

The waste of human Ufe from illness and accidents is ap- 
palling. An almost incredible number of lives are snuffed 
out before the first birthday; and a large percentage die 
before maturity. Many who survive and reach maturity 
are stunted in body and mind, untrained, inefficient, ineffec- 
tive, diseased, dissipated, and vice-ridden. Furthermore, the 
number of defectives is increasing. Society is wasting far 
too much of its human as well as of its natural resources. 
Unless the death rate is lowered and the amount of sickness 
reduced, social betterment cannot be looked for with any 
degree of expectancy. The nation may instead face the un- 
welcome specter of social degeneracy. Poor health among 
the great mass of people increases inefficiency, crime, and 
poverty. Poor health in turn is due in no small measure 
to bad, insufficient, and improperly selected food, to in- 
sanitary housing conditions, to lack of proper recreation, 
and to bad habits. Poverty often leads to sickness; and 
sickness is on the other hand a potent cause of poverty. 
The death rate is much higher in the tenement districts of a 
city than in the better residence sections. A positive health 
program would include improvement in housing conditions ; 
pure water, milk, and food supplies ; clean streets and alleys ; 
better factory conditions; improvement in curative and 
especially in preventive medical science ; health insurance ; 
and education in regard to food values and proper diet. 

Social betterment is conditioned not merely on greater 
equality in the distribution of the products of industry but 
also on greatly increasing the output of desirable products. 
Better health will improve the efficiency of individuals. 
Scientific management and psychological research have 
proved that the great majority of individuals are far from 
attaining their maximum of efficiency in either manual or 



208 ELEMENTARY ECONOMICS 

mental work. The average student does not know how to 
study or how to use effectively his brain power; and the 
average manual worker is inefficient as an individual laborer 
and too often he is not properly coordinated with others to do 
good teamwork. A positive program to increase the ef- 
ficiency of the man-power of the nation would include re- 
duction of sickness and accidents, the application of scientific 
methods in regard to the training and work of individuals 
and of groups of individuals, better educational facilities, 
the elimination of gainful child labor, and the reduction of 
idleness and unemployment. All normal adults should be 
efficient workers. The program would also include the 
economical utilization and conservation of the natural re- 
sources of the nation and of the world. 

The complexity and interdependence of modern life, to 
which attention has been directed, makes necessary universal 
and compulsory training of the youth. Education inside 
and outside the school system should place before. the in- 
coming generation the experience and ideals of preceding 
generations ; its purpose is to make the new generation 
" the heir of the ages." Education should aid 'in developing 
strong and healthy bodies and alert mental powers ; it 
should be a potent factor in directing and controlling the 
desires and passions of the youth ; it should help to create 
an interest in art, literature, and social welfare ; and it should 
give specific instruction in a trade or profession which will 
enable the student to become a skillful, useful, and selfr 
reliant worker. 

Work is not an end in itself; it is a means to an end. 
Social betterment will result in more of leisure, recreation, 
and enjoyment for the masses. The use of machinery 
and natural power and the adoption of a positive pro- 



SOCIAL AND INDUSTRIAL BETTERMENT 209 

gram for increasing the efficiency of all workers, will 
offer a larger and larger opportunity for leisure. Shorter 
working days, Saturday half-holidays, and a summer va- 
cation are some of the fruits which seem at the present time 
feasible, — although the war has tended to delay progress 
in this direction. In turn, a minimum of leisure and recrea- 
tion are essential to efficiency. Furthermore, play, games, 
and amusements of the proper kind and well supervised, are 
tremendous forces in building up good character and physical 
stamina. 

The World War is teaching conclusively the value of inter- 
nationalism and of a world alliance. Any worth-while pro- 
gram for social betterment will be not merely local, national, 
or class in its scope ; it will be a world and humanity pro- 
gram. It will transcend the limits of nations, of classes, and 
of races ; it will look to the brotherhood of man. 



^. 



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n - 2. 



INDEX 



Acceptances, 95. 
Adamson Act, 116. 
Americanization, 79, 127, 130. 
Anthracite coal monopoly, 86. 
Australia, public business in, 124. 

Birth rates, 78, 

Bondholders, 104, 106. 

Bonds, gilt-edged, 60; Liberty 

Loans, 60. 
Budget, English, 187; New York 

City, 188. 
Business principles, 50. 

Canal, Erie, 18. 

Capital goods, 38, 46, 47. 

Chance gains, 67. 

Chase, Harvey S., 183. 

Checks, 94, 97. 

ChHd labor, 148. 

China, 77. 

Chinese laborers, excluded from 

U. S., 130. 
Commerce Commission, Interstate, 

113, 115, 116, 117, 118. 
Constitution of the United States, 

143, 180, 199. 

Death rates, 207. 
Democracy, 77, 78. 
Depreciation, 66, 105. 
Discrimination, railway, 112, 113, 115. 

Education, aim of, 208. 
Efficiency of individuals, 207-209. 
Eight-hour day, advantages of, 145. 
Employment bureaus, public, 198. 

Famine, world, 24. 

Farm family, 160; laborers, 127, 

161 ; property, 158, 161. 
Food supply, 8, 77, 174; survey of 

Altoona, 175. 



Gold, 92. 

Gompers, Samuel, 136. 

Income, 30, 43, 44, 65, 70, 77, 105, 

181. 
Industrial Relations, Commission on, 

196, 197, 199. 

Japanese laborers, excluded from 
United States, 130. 

King, Professor, 181. 

Labor, definition of, 53 ; division of, 
19, 22, 28, 29, 76, 131 ; Legislation, 
American Association for, 169 ; 
power, sale of, 53, 54, 55, 56, 142, 
143 ; turnover, 198. 

Land, 38, 60, 62, 65, 203 ; grants, 117. 

Legislation, sumptuary, 51. 

Leisure, 134, 145, 208, 209. 

Man, primitive, 1, 2, 8, 10, 14, 198. 
Manufacturers, National Association 

of, 140. 
Markets, public, 178. 
Middlemen, statistics of, 176, 177. 
Migratory workers, abnormal life 

of, 200. 
Mine Workers, United, 136, 137. 
Minimum wage laws, 148. 
Monopoly, 82-85, 111, 119, 120, 180, 

206 ; gains, 67, 124, 203. 

Negroes, migration to north, 129. 

Opportunity, equality of, 206. 

Pioneer, characteristics of, 7, 12, 16, 

21, 30, 126, 158, 198. 
Pooling, 115. 
Poverty, 71, 72, 129, 207. 
Primitive man, see Man. 



211 



212 



INDEX 



Promoters, 106. 
Property, private, 10, 11. 
Purchasing power, 45, 51, 94. 

Railways and markets, 32, 109 ; 
governmental operation of Ameri- 
can, 117; growth of, 18, 110. 

Recreation, economic importance of, 
209. 

Rediscounting, 99, 100. 

Regulation of industry, 40. 

Revolution, industrial, 12. 

Rural exodus, 162. 

Salesmanship, 46, 179. 

Shoe Machinery Company, United, 

87. 
Silver, 92. 

Slavery, 9, 11, 13, 79, 204. 
Sociologists, program of the, 205- 

206. 
Soil, fertility of the, 62. 
Speculators, 40. 

Standard Oil Companies, 86, 107. 
Standardization, 33. 
Stock, common, 105 ; preferred, 105. 
Stockholders, 103, 104, 106 
Sweating, 150, 



Tax Commission of Minnesota, 184 ; 
income, 52, 71, 189, 191, 195, 206; 
inheritance, 52, 192, 195. 

Trade agreement system, 56 ; Com- 
mission, Federal, 107. 

Transportation, chief means of, 31. 

Union, industrial, 137 ; trade, 136. 
United States Steel Corporation, 107. 

Variety of goods, 37. 

Wage, fair, 58, 108, 199; workers, 
number of, 126. 

Wants, human, 27, 28, 35, 36, 39, 
40, 49, 91, 101. 

War, the Great, 24, 32, 49, 71, 109, 
209. 

Wasteful competition, 84, 121, 204; 
consumption, 51. 

Waste of human life, 207. 

Wealth of the American nation, 69. 

Welfare work, 155, 202. 

Work, doctrine of make, 49 ; waste- 
ful, 45, 47, 48, 50. 

Workers of the World, Industrial, 
132, 136, 139, 205. 

World alliance, 209. 



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